1. food and drink
2. beverages
3. non alcoholic beverages
4. coffee and tea

INDO- SRI LANKA FREE TRADE AGREEMENT: AN ASSESSMENT OF
POTENTIAL AND IMPACT
INDRA NATH MUKHERJI1
TILANI JAYAWARDHANA
SAMAN KELEGAMA
1. Introduction
In recent years there has been an upsurge in Bilateral Free Trade Agreements (BFTA). As of now there
are as many as 38 such Agreements outside South Asia, the most recent ones being the SingaporeJapan and Singapore-New Zealand BFTAs. . In addition, several regional groupings have developed
bilateral trade linkages with non-members. To illustrate, the European Community (EC) has as many
as 28 BFTA with individual member states. Similarly the European Free Trade Area (EFTA) has 12
bilateral trade agreements with member states.
In South Asia also there has been a surge in BFTA. India and Bhutan have BFTA since fifties. A
BFTA between India and Sri Lanka became operational in March 2000. India is currently
contemplating similar BFTA with Bangladesh and Maldives. Recently there have been initiatives to
establish BFTA between Sri Lanka and Pakistan, Sri Lanka and Bangladesh, Nepal and Sri Lanka, and
Nepal and Bangladesh. The recent shift in signing of BFTA has partly been due to the slow and tardy
progress under South Asian Preferential Trading Arrangement (SAPTA) being negotiated under
SAARC.
The Commerce Secretary of India and Finance Secretary of Sri Lanka exchanged letters that
operationalise the Indo-Lanka Free Trade Agreement (ILFTA) between India and Sri Lanka signed in
New Delhi on 28 December 1998 by H.E. the President of Sri Lanka and the Honorable Prime
Minister of India with effect from 1st March 2000.
The Agreement provides for duty free as well as duty preference access for the goods manufactured in
the two countries. Both the countries have listed products for immediate duty free entry into each
other's territories. India has agreed to phase out its tariffs on a large number of items within a period of
three years. Sri Lanka will likewise do so in eight years. Both the countries have drawn up Negative
Lists in respect of which no duty concessions will apply. These Lists include items on which protection
to local industry has been considered essential. Both the countries intend to reduce the items in the
Negative List through periodic consultations.
1
The author expresses his thanks to Dr.Amit Sovan Ray for his valuable comments to inputs provided by the Indian
collaborating institution. He also expresses his thanks to Mr. Jai Kumar and Ms. Nandini for their valuable assistance in
computation of data. Thanks also to Office of the Director General of Commercial Intelligence and Statistics, Ministry of
Commerce, Kolkata for providing monthly statistics without which the study could not be completed.
The Agreement sets out the rules of origin criteria for eligibility for preferential access. Products
having domestic value addition of 35% will qualify for preferential market access. Sri Lanka's exports
with a domestic value addition content of 25% will also qualify for entry to the Indian market if they
have a minimum 10% Indian content.
In respect of a number of sensitive items preferential treatment is accorded with only partial lifting of
quantitative restrictions. India will permit the import of Sri Lankan tea to the extent of 15 million kg.
per annum at a fixed tariff preference of 50%. Under the initial terms of the Agreement India would
permit import of 8 million pieces per annum from Sri Lanka at a fixed tariff preference of 50%. Out of
this, 6 million pieces fabric need to be sourced from India. A ceiling of 1.5 million pieces was
prescribed for individual categories. In respect of textile items, India's offer is restricted to a maximum
of 25%.
The agreement was renegotiated following commerce Secretary Level talks on 6th June 2002, Joint
Ministerial Committee Meeting on 7th June, 2002 in New Delhi, followed by Senior Officials Meeting
in Colombo from 4th July to 5th July 2002.
With respect to market access for tea, the Sri Lankan side responding to the request made by Indian
side to export Indian teas for home consumption in Sri Lanka stated that it agreed to this request on
payment of the prevailing MFN duty and subject to a number of quality parameters.
In respect of the request made by the Sri Lankan side for more entry ports for tea the Indian side
responded positively and offered two more ports (in addition to existing Cochin and Kolkata) with
immediate effect, namely, Mumbai on the West coast and Vishakhapatnam on the East coast.
With respect to garments, India responded to Sri Lanka’s request, deepening specific duty concessions
on 51 tariff lines at a 6- digit H.S level. India agreed to increase the specific duty tariff concession
wherever applicable on requested tariff lines from 50% to 75%. However, ad valorem duty
concessions on these lines would continue at 50%.
On Sri Lankan request, India agreed to increase the unrestricted quota of 2 million pieces in respect of
which fabric of non-Indian origin is used when Sri Lanka fully utilizes this quota. On utilization
unrestricted quota India agreed to give additional quota of two million pieces out of total of 8 million
pieces. Further, India agreed to increase the level of quota per category per annum from 1.5 million to
2 million pieces.
Responding to Sri-Lanka’s request to have more ports as entry points for garments, India agreed to
provide Kolkata and JNPT (Mumbai) as additional ports.
2
On India’s request for an increase in the Margin of Preference (MOP) to 50% in respect of the imports
of bulk cement from India from the present level of 20%, the Sri Lankan side agreed to increase the
MOP to 35%.1
The ILFTA between India and Sri Lanka is a landmark in the bilateral relations between the
two countries. It is expected to bring about enhanced trade between the two countries as well as to
expanded and diversified cooperation in a range of economic spheres, including investments. This is
the first such Agreement in the South Asian region which could serve as a model for similar bilateral
Agreements in the region. It has an institutional framework in the form of the Indo-Lanka Joint
Commission, a dispute settlement mechanism, and so forth. Its significance further lies in that it can be
implemented more expeditiously and also more flexibly, unlike the protracted nature of negotiations
generally associated with multilateral arrangements.
The short, following features characterize Indo-Sri Lankan Free Trade Agreement:
2. Elimination of Tariffs
2.1 By India
1. Zero duty on items upon entering into force of the Agreement – the list is to be finalized
within 60 days of signing of the Agreement.(E): 1351 products
2. Concessions on Textile items restricted to 25% on Chapters 51-56, 58-60, & 63. Four
Chapters under the Textile sector retained in the negative list (Chapters 50,57,61 and
62) (TEX): 528 products
3. Garments (GAM)covering Chapters 61&62 while remaining in the negative list, will be
given 50% tariff concessions on a fixed basis, subject to an annual restriction of eight
million pieces, of which six million shall be extended the concession only if made of
Indian fabric. On utilization of the unrestricted quota, an additional quota of 2 million
pieces out of 8 million pieces is permitted. The quota level per category is increased
from 1.5 million to 2 million pieces per category per year. (GAM): 223 products
4. 50% tariff preference on five tea items, subject to a quota of 15 million Kg. per year
(TEA): 5 products.
5. 50% margin of preference upon coming into force of this Agreement on all items,
except for those on the negative list. To be phased out to zero duty in three years.( IR):
2799 products
3
6. A Negative List of items to be retained (D I): 429 products
2.2 By Sri Lanka
1. Zero duty on about 319 items upon entering into force of the Agreement (F I): 319
products
2. Phasing out of tariffs on items with 50% margin of preference on 889 products upon
coming into force of the Agreement, with up to 70% at the end of the 1st year, up to 90%
at the end of the 2nd year and 100% at the end of 3rd year (F II): 889 products.
3.
For the remaining items, (except for those on the negative list), which is the Residual
List, preference would be not less than 35% before the expiry of three years, 70%
before the expiry of six years and 100% before the expiry of eighth year.(SLR): 2724
products.2
4.
A Negative List (D II): 1180 products.
Table 1 presents the main features of the nature of concessions exchanged by India and Sri Lanka.
Table 1: Broad Agreement on Tariff Concessions under ILFTA
Granting
Country
India
Degree of Tariff Cut
0 per cent removal of tariff
25 per cent removal of tariff
100 per cent removal of tariff
50 per cent removal of tariff
Sri Lanka
50 per cent removal of tariff
followed by phased out removal of
tariff
0 per cent removal of tariff
100 per cent removal of tariff
Description of Items Receiving Tariff Cut
for items in Annexure D of the agreement
(Negative List)
for items in Chapters 51-56, 58-60, 63
for items in Annexure E of the agreement
Up to 15Mn. Kgs. Of Tea, 2 Mn. pieces of
garments, and 6 Mn. pieces of garments using
Indian fabrics. On utilization of unrestricted quota,
an additional quota of 2 million pieces out of 8 Mn.
pieces is permitted.
for remaining items (margin will be increased upto
100 per cent in two stages within three years)
for items in Annexure D of the agreement
for items in Annexure F-1 of the agreement
4
50 per cent removal of tariff
followed by phased out removal of
tariff
Residual List
for items in Annexure F-II of the agreement (the
margin will be deepened to 70 per cent, 90 per cent
and 100 per cent respectively at the end of first,
second and third year of the entry into force of the
agreement)
for remaining items by not less than 35 per cent
before the expiry of three years. 70 per cent before
the expiry of sixth year and 100 per cent before the
expiry of eighth year
Note: No. Of Items:
India: Negative List: D (I): 429; Garments: 233; Zero Duty: 1351; Tea: 5; Textiles: 528; Phased
Residual List: IR: 2799 (zero duty in three years).
Sri Lanka: Negative List: D (II): 1180; Zero Duty: (F1): 319; Phased Immediate: F (II) (three
years): 889; Phased Residual: (SLR): (3rd-8th year): 2724.
2.3 Plan of Study and Methodology
The plan of the study is to:
•
Analyze how much of the bilateral trade – both imports and exports are covered under
different categories of concessions offered and received by India and Sri Lanka over the
past six years, viz. 1996-97 to 2000-01.
•
To analyze, in terms of 21 HS Sections, the distribution of trade under each category of
concessions.
•
To analyze the top products in terms of 6-digit HS Classification for both the countries
under each category to identify the success stories,
•
To analyze the impact of tariff reduction/removal on increased imports and whether the
increased imports have caused trade diversification in terms of new products.
•
The aforementioned analyses is carried out using national trade statistics of both the partner
trading countries, India and Sri Lanka
The concessions offered by the Contracting States have been at 6-digit HS classification. In order to
attain the aforementioned objectives, the bilateral trade data is analyzed at 6-digit HS classification.
The data has been obtained from the Ministry of Commerce (India) electronic database over the past
six years-viz., 1996-97 to 2001-02. This provides data for two years after the ILFTA was implemented.
The Indian source further utilizes monthly import data for 24 months prior to and after liberalization to
assess the impact of tariff concessions offered by India on Sri Lanka preferential imports. For Sri
Lanka data is also presented at 6-digit HS classification and the source is Sri Lanka Department of
Customs and Sri Lanka Department of Commerce. The standard of reporting Sri Lankan data is on the
5
basis of the calendar year. Therefore, from the calendar year data has been converted to the Indian
fiscal year (from 1st April to 31st March) in order to obtain accurate compatibility of the data.
The study is complemented by field survey using structured questionnaires and also by conducting
interviews with stakeholders.
3. Extent of Trade Liberalization: Analysis from Indian Data Source
3.1 Imports from Sri Lanka
3.11 India’s Imports from Sri Lanka under Different Categories in Relation to Bilateral Imports
According to a study by Weerakoon 3(2001), looking at the overall distribution of concessions under
the FTA, of the 2,907 products being exported to Sri Lanka by India, 21.4 per cent are subject to the
negative list, only 0.1 per cent would benefit from zero tariffs and 20.6 per cent have received
preferential tariff reduction. Conversely, of the 380 products exported to India by Sri Lanka, 13.1 per
cent are subject to the negative list, 17.9 per cent to zero tariffs, 57.4 per cent will enjoy preferential
tariff reduction of 50 per cent and a further 11.6 per cent of exports will be subject to preferential duty
reduction of 25 per cent.
It is the value of trade coverage, rather than the product coverage that is significant in estimating the
value of concessions exchanged. This paper makes an attempt in this direction by analyzing the
product value coverage for six years, viz. 1996-97 to 2001-02. The methodology used is to consider all
negotiated products at 6-digit level of classification, being traded bilaterally. The value is aggregated
across all categories of products exchanged concessions and their share in total trade is estimated over
the selected years. The value of trade under the Negative List is similarly estimated for both the
countries. The estimates are derived using national trade statistics of the respective partner countries.
The information with respect to India’s bilateral import liberalization has been presented in Table 2.
Table 2: India's Import Value and % Share in Bilateral Imports of Products under Different
Categories Offered Concessions: 1996-97 to 2001-02
Categories
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
43985.16
30145.90
37702.95
44223.86
45010.19
67170.05
Bilateral
Total
Imports(US
D’000)
Negative
16.00
15.66
8.15
10.08
9.03
5.93
List: D(ii)
Zero Duty:
6.98
3.51
9.69
10.78
24.19
19.13
FI
6
Residual:
71.81
65.72
75.58
71.79
59.79
68.35
SLR
Tea
0.12
1.98
1.81
4.56
3.89
3.63
Textiles
1.52
0.81
3.77
2.25
2.71
2.18
Garments
0.00
0.01
0.51
0.83
0.30
0.10
All
96.43
87.70
99.51
100.29
99.91
99.32
Categories
Source: Data Compiled from Director General of Commercial Intelligence & Statistics, Ministry of
Commerce Database, and Government of India.
Chart 1: India's Import Share in Bilateral Trade of Products under Different Categories
Offered Concessions by Sri Lanka 1996-02
80
70
60
50
40
30
20
10
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Textiles
Garments
Year
Negative List
Zero Duty
Residual
Tea
Data for the period 1996-97 to 2001-02 reveals that the residual list was the largest category of items
liberalized by India accounting for between two-thirds to three-fourths of India’s imports from Sri
Lanka. Next in importance was the negative list accounting between 6-16% of India’s total imports. In
2000-02 India’s import share for tea was nearly four per cent while its import share for textiles was
nearly three per cent. India’s import share of garments was less than one per cent. Looking at the trend
over the six years period under study, we notice that India’s import share for zero duty products has
been increasing steadily. The share increased steadily from nearly 7 % in 1996-97 to 24% I 2000-01
after which it declined to 19.13% in 2001-02. Also to be noted that India’s import share of tea and
textiles, even though modest, have been increasing its share steadily. The import share of garments has
7
however, been declining since 1999-00. The import share for products under residual list declined
between 1999-00 to 2000-01 but improved its share in 2001-02. Chart 1 presents the trend
graphically.
3.12 India’s Imports from Sri Lanka under Different Categories in Relation to World Imports
Table 3 shows the share of India’s imports from Sri Lanka in different categories in relation to the
import of similar products from the world. It will be observed that except for the products under the
Negative List, the import share of products under all categories has gone up during the six-year
reference period. The share of products under the Negative List which had not received any
concessions, showed a declining trend. The trend is shown graphically in Chart 2. The import share of
tea has not been shown as its share is unusually large which makes viewing of shares in other
categories difficult in the same chart.
Table 3: India's Bilateral Import Value and Per Cent Share in World Imports of Top 50
Products under Different Categories Offered Concessions: 1996-97 to 2001-02
Categories
1996-97 1997-98 1998-99 1999-00 2000-01
2001-02
Bilateral Total Imports(USD’000)
43985.16 30145.90 37702.95 44223.86 45010.19 67170.05
Negative List: D(ii)
4.23
2.30
1.30
1.82
1.34
1.27
Zero Duty: FI
0.23
0.02
0.23
0.33
0.63
1.02
Residual: SLR
1.51
1.05
2.05
1.89
1.47
2.21
Tea
2.86
12.45
4.43
34.04
18.21
17.34
Textiles
0.73
0.27
0.61
0.35
0.62
0.99
Garments
0.00
0.10
3.43
4.09
1.66
0.75
Source: Data Compiled from Director General of Commercial Intelligence & Statistics, Ministry of
Commerce Database, Government of India.
8
Chart 2: India's Import Share of Top 50 Products in World Imports under
Different Categories Offered Concessions: 1996-97 to 2001-02
5
4
3
2
1
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Negative List
Zero Duty
Residual
Textiles
Garments
3.13 India’s Imports of Products under Different Categories by HS Section Classification
Annex 2 presents full description of 21 product groups contained under different Sections of the
Harmonized System (HS).
Annex 3 presents India’s imports of products under different categories offered concessions to Sri
Lanka by HS Sections. It will be seen that the imports of products under zero duty category had
increased rapidly from USD 4.7 million in 1999-00 to USD 12.9 million in 2001-02. The share of
mineral products (Section V) under the category had increased rapidly from 1.29 per cent to 42.23 per
cent during this period. Wood pulp (Section X), products of chemical and allied products (Section VI)
were the most important products under this category in 2001-02.
The import of products under the category of residual list also improved significantly from USD 31.75
million in 1999-00 to USD 46.05 million in 2001-02. The two most important group of products
imported under this category in 2001-02 were vegetable products (Section II) and base metals (Section
XV).
Under the category of textiles, India’s imports of textile and textile products (Section XI) increased
from USD 1 million in 1999-00 to USD 1.47 million in 2001-02.
9
India’s imports of garments (Section XI) however declined from USD 0.4 million in 1999-00 to USD
0.06 million in 2001-02.
India’s imports of tea from Sri Lanka increased from USD 2.01 million in 1999-00 to USD 2.44
million in 2001-02. Vegetable products (Section II) accounted for the bulk of imports under this
category.
India’s import of products under the Negative List (those not offered duty concessions) declined from
USD 4.45 million in 1999-00 to USD 3.99 million in 2001-02. The most important products under Sri
Lanka’s Negative List included plastics, rubber and articles thereof (Section VII), followed by wood
pulp (Section X) and textile products (Section XI).
3.14 India’s Product-wise Analysis of Imports from Sri Lanka
Annex 4 presents a list of top 50 products (as in 2001-02) being imported by India under zero duty.
These top fifty products as a whole improved its share post liberalization not only in terms of its share
in India’s total bilateral imports, but also in terms of its share in world imports.
The products most responsive to removal of import duties by Sri Lanka were other oil and oil products
(HS 270799) and p-xylene (HS 290243). These products were being imported for the first time since
import liberalization. The other products which improved in import value and share in world imports
were waste and scrap of unbleached craft paper (HS 481910), cartons, boxes, cases of corrugated paper
(HS 481910), sacks and bags (HS 481930) etc.
Annex 5 presents India’s import of top 50 products (as on 2001-02) under the residual category. The
import value of products under this category increased from USD 25.94 million in 1999-00 to USD
43.69 million in 2001-02. Over this period even though the value share of products as a whole under
this category declined in relation to India’s bilateral imports, its share in relation to world imports
showed an improvement.
A product-wise analysis shows that India’s import of cloves (HS 090700) improved significantly
following liberalization, as also its share in world imports. The other products in respect of which
India’s imports from Sri Lanka improved significantly following tariff cuts were other refined copper
(HS 740319), copper waste and scrap (HS 740400), marble travertine (HS 680221), nutmeg (HS
090810), other refined lead (HS 780199) etc. the import of these products also improved in relation to
world imports. The table reveals that quite a number of products began to be imported for the first time
from Sri Lanka, implying diversification of Sri Lanka’s exports to India.
10
Annex 6 presents India’s top 50 products (as in 2001-02) under the category of textiles. It will be
observed that while the value share of top 50 products in India’s bilateral imports from Sri Lanka
declined following liberalization, its share in relation to world imports showed an improvement. Some
textile products whose share improved included wadding (HS 560129), labels (HS 580710), woven
fabrics (HS 580620), other knitted /crocheted fabrics (HS 600292), etc. The share of these products in
India’s world imports also improved.
India’s imports of top 50 garment products (as in 2001-02) from Sri Lanka does not reveal any positive
effect following liberalization in India as may be seen in Annex 7. The value share of all products
included in this category declined both in terms of India’s bilateral imports as also in relation to world
imports. Looking at the list however, we notice modest imports of some products, for the first time,
following liberalization in India. Some of these products include men’s or boy’s shirts (HS 620530),
shirts of other textile materials (HS 620590), other gloves of cotton (HS 611692), etc.
Annex 8 presents India’s imports of tea from Sri Lanka. Since 1999-00 there has been a marginal
improvement in India’s tea imports from Sri Lanka. However the value share has declined not only in
relation to India’s bilateral imports, but also in relation to imports from the world. A product-wise
analysis shows that India’s imports of black tea (HS 090230) improved in value both in relation to
bilateral imports and imports from the world. The imports of tea extracts (HS 210120) and other green
tea (HS 090220) also improved in terms of value and value share.
Annex 9 lists the top 50 products (as in 2001-02) imported by India from Sri Lanka under the Negative
List. The value as well as value shares of products as a whole under this category has been declining
particularly since 1999-00. This is not unexpected given that such products are not eligible for tariff
concessions by India. The most important products under India’s Negative List include other articles of
plastics (HS 392690), articles of apparel (HS 392620), printed labels (HS 482110), natural rubber (HS
400129) etc
3.15 Trade Creation/Diversion in India’s Preferential imports
Since India’s preferential imports have increased in a number of products, it has to be seen whether
this increase has been at a lower or higher unit price in relation to similar imports from the rest of the
world. In case of the former, there would be trade creation whereas in case of the latter, there would be
trade diversion. This exercise has been done for all products whose imports increased over the two
year post-liberalization period beginning 1999-004. Annex 10 presents the results of this analysis. It
will be seen that the results point to overall trade creation of USD 3.74 million as a result of trade
11
liberalization during the period 1999-00 to 2001-02. Most of the trade creation is on account of
products included under residual category (USD 3.90 million). The products included under the
categories of textiles and garments show modest trade creation of USD 0.5 million. The products
included under the category of zero duty show modest trade diversion of USD 0.2 million. Minor trade
diversion is also to be noticed in case of tea imports. A close scrutiny of the data reveals that under
zero duty the largest trade diversion has taken place in case of imports of other oil and oil products for
distillation (HS 270799) and other machinery (HS 843880). The largest trade creation has taken place
in case of trisodium phosphate (HS 283523) and other sacks and bags (HS 481940).
In case of products included under residual category, the largest trade creation has taken place in
respect of other metal furniture (HS 940320) and statuattes of porcelain/china (HS 691310). On the
other hand, the greatest trade diversion has taken place in case of cloves (HS 090700)
3.16 Impact on Preferential Imports
To assess the impact of tariff concessions offered by India on imports from Sri Lanka we first identify
products that were not imported in any one year before liberalization (since 1996-97 to 1999-00) but
started being imported since post-liberalization period, viz. 2000-01 to 2001-02. The list of such
identified new products (defined as above) has been presented in Table 4. The probability of such
products being imported as a result of tariff concessions is quite marked.
Table 4: New Products in India’s Imports from Sri Lanka under ILFTA (6 Digit HS Codes)*
ZERO DUTY
RESIDUAL
TEXTILES
GARMENTS
TEA
290243
680221
550921
620530
210120
845140
780199
540730
611692
291221
740312
520832
611610
283523
740710
530720
611699
283650
740329
580610
620990
283529
940600
580390
620342
841810
230650
521019
620452
842240
691310
630900
621010
480429
890800
580430
610349
480830
262030
631010
610831
845590
721061
551211
610839
283210
680291
551229
611693
845011
711011
551511
611790
482351
940330
600291
620299
847141
800300
520823
620343
845180
390730
540743
620411
842382
620822
482290
621149
841830
12
291411
310510
841370
482030
848190
283699
844790
480820
841850
270799
Note: for description of products see Annex Tables 4-8.
For the analysis of impact of tariff concessions on other products could not be done on the basis of
limited annual data. Hence monthly data covering a period of two years pre-liberalization (April 1998March 2000) and two years post-liberalization (April 2000-March 2001) was obtained. In quite a
number of products the imports were nil in several months. In view of the nature of data, no significant
statistical trend could be observed for products under different categories. It was thus thought desirable
to examine the trend in terms of sum of values of all imported products in individual categories of
products offered (excluding the Negative List, the products under which were not subject to tariff
concessions).
Plotting the trend on monthly time scale shows that the overall trend in growth over the two years (48
months) was positive for products included under zero duty, residual and tea categories but negative in
case of textiles and garments. However the monthly data shows the large degree of fluctuations in
imports particularly post-liberalization. Two statistical tests were done to assess the impact of tariff
preferences. The first test examines the statistical difference in the means of the two pre-liberalization
and post-liberalization samples. Annex A, Table 1 presents the results.
F-test assumed the equality of variances in the two sample sets. This hypothesis was validated in case
of imports under all categories excluding garments. The student’s t- test reveals that the difference in
the two sample means is significant validating the positive impact of tariff preferences on imports
(excluding garments)5.
The second test has estimated a semi-logarithmic relationship between imports (as dependent variable)
and time and intercepts dummy variables to assess the impact of policy change (taking value 0 for first
24 observations and 1 for the subsequent 24). Three year moving averages were used to adjust for
seasonality of data. The results have been presented in Annex A, Table 2. It will be observed that due
13
to excessive fluctuations in monthly data, the relationships are generally not found to be statistically
significant either in respect of time or policy variable. The only exception to this is the time variable
for products under zero duty in which the time variable has been found to be statistically significant at
less than 5 % level of significance. This variable found to be significant at only 10% level in case of
products under residual list. It will be observed that the policy response has not been favorable for
textiles and garments. The reason for lack of significant relationship, as stated earlier, is the high
fluctuations in monthly data since liberalization.
3.2 Exports to Sri Lanka
3.21 India’s Export to Sri Lanka in Relation to Bilateral Export under Different Categories
Table 5 presents India’s export share of products under different categories offered concessions by Sri
Lanka. The objective is to assess the composition of India’s exports to Sri Lanka under different
categories and to examine the impact of Sri Lanka’s trade liberalization if any. The figures for 2001-02
reveal that products under residual list accounted for nearly 44% of India’s exports to Sri Lanka. Next
in importance came products under the negative list, accounting for nearly 37%. The products under
phased category accounted for nearly 12%. The products covered under zero duty concessions
accounted for a little less than one per cent. Since India’s overall export to Sri Lanka has been
increasing, the value of the products under liberalized categories has been increasing. However, no
positive impact on export shares of these categories is visible on products offered concessions under
different categories. The trend in export shares under different categories is presented in Chart 3.
Table 5: India's Export Value and Per Cent Share in Bilateral Exports of Products under
Different Categories Offered Concessions by Sri Lanka, 1996-02
Categories
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Bilateral
Total Exports
(USD ‘000)
Negative
List: D(ii)
Zero Duty: FI
Residual:
SLR
Phased: F II
All
Categories
479736.47
488501.89
43444.04
499072.52
640206.22
628939.72
43.36
37.30
32.46
36.60
36.66
38.28
0.84
39.17
0.88
44.07
1.55
52.82
0.97
51.76
0.78
49.19
0.83
43.84
12.66
96.03
12.46
94.71
12.47
99.30
10.23
99.56
12.68
99.31
11.50
94.45
Source: Data Compiled from Director General of Commercial Intelligence & Statistics, Ministry of
Commerce Database, Government of India.
14
Chart 3: India's Export Share in Bilateral Exports of Products under Different
Categories Offered Concessions by Sri Lanka, 1996-02
60
50
40
30
20
10
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Negative List
Zero Duty
Residual
Phased
3.22 India’s Export to Sri Lanka in Relation to World Export under Different Categories
India’s exports of top fifty products as per cent world exports of similar products in each category
receiving concessions have been placed in Table 6. It will be seen that as in the case of imports, the
share of Sri Lanka in India’s world exports has been rising under different categories since 1999-00.
The only difference is that unlike the Negative List, whose share declined under bilateral import
shares, the same showed a rising trend in case of exports along with the trend with similar rising trend
with respect to all other categories. Chart 4 shows the trend.
Table 6: India's Export Value and Per Cent Share in World Exports of Top 50 Products under
Different Categories Offered Concessions by Sri Lanka, 1996-02
Categories
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Bilateral Total Exports (USD
‘000)
Negative List: D(ii)
Zero Duty: FI
Residual: SLR
Phased: F II
479736.47
488501.89
43444.04
499072.52
640206.22
628939.72
4.23
0.57
1.07
3.88
3.64
0.49
1.17
3.87
2.57
0.77
1.26
3.27
3.97
0.44
1.09
3.26
4.48
0.39
1.30
3.80
4.81
0.50
1.40
4.95
15
Source: Data Compiled from Director General of Commercial Intelligence & Statistics, Ministry of
Commerce Database, Government of India.
Chart 4: India's Export Share of Top 50 Products in World Exports under
Different Categories Offered Concessions by Sri Lanka, 1996-02
6
5
4
3
2
1
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Negative List
Zero Duty
Residual
Phased
3.23 India’s Export of Different Categories Offered Concessions by HS Sections
Annex 11 presents India’s exports of products offered concessions under different categories by
section-wise HS classification. It will be observed that in 2001-02 products of chemical and allied
industries (Section VI) accounted for as mush as 96.21 per cent of exports under zero duty category
and the remaining 3.79 per cent was accounted for by machinery and mechanical appliances (Section
XVI). The value of zero duty exports increased from USD 4.82 million in 1999-00 to USD 5.24
million in 2001-02.
Under the residual list textile and textile products (Section XI) accounted for 41.53 per cent of India’s
exports in 2001-02. The products of chemical and allied industries (Section VI) accounted for 16.63
per cent and vehicles etc. (Section XVII) 10.17 per cent of India’s total exports under this category in
the same year. During the period 1999-00 to 2001-02 the value of India’s exports under the residual
category increased from USD 258.36 million to USD 276.61 million in 2001-02.
16
Under the category of phased reduction, the value of India’s exports to Sri Lanka increased from USD
51.04 million to 72.54 million during the period 1999-00 to 2001-02. Under this category base metals
(Section XV) accounted for 50.79 percent, machinery and mechanical appliances (Section VI) 9.94 per
cent in 2001-02.
During the period 1999-00 to 2001-02 the value of India’s exports under the Negative List increased
from USD 182.69 million to USD 241.53 million. In 2001-02 vegetable products (Section II)
accounted for 27.67 per cent and prepared foodstuffs (Section IV) 28.56 per cent of India’s total
exports to Sri Lanka under this category.
3.24 Product-wise Analysis of India’s Exports Offered Concessions by Sri Lanka
Annex 12 presents India’s exports of top 50 products (as in 2001-02) under zero duty concessions
offered by Sri Lanka. A look at the table reveals that India’s exports under this category increased
marginally from USD 3.4 million in 1999-00 to USD 5.00 million in 2001-02. Both the value shares
declined marginally. Some products that improved their export value and also value shares include
other aromatic acids (291739), other heterocyclic compounds (293390), other lactums (293379),
terephthalic acid (291736),etc. Some of these products started being exported for the first time
following import liberalization in Sri Lanka.
Annex 13 lists India’s export of top 50 products (as in 2001-02) exported to Sri Lanka under phased
reduction. The share of top 50 products as a whole improved its export value from USD 22.13 million
in 1999-00 to USD 53.56 million in 2001-02. As a consequence, the total value share of these products
in India’s world exports improved following liberalization in Sri Lanka. Some products which
improved in value and value shares included parts of machines (847990), products containing carbon
(720711), carbon blacks (280300), bars and rods (721391) etc.
Annex 14 presents a list of top 50 products (as on 2001-02) offered concessions by Sri Lanka under
the residual list. These products are to be liberalized by at least 35 per cent by the end of the third year.
In practice, these products have undergone tariff cuts by 10 per cent in the first year and by 20 per cent
by the end of the second year. The share of top 50 products under this category improved its export
value and value share in relation to world exports following liberalization of imports by Sri Lanka.
Annex 15 lists the top 50 products (as in 2001-02) exported by India to Sri Lanka under the Negative
List. The table reveals that even though these products were in the Negative List of Sri Lanka, India’s
17
exports under the category increased both in terms of value and value shares. Some of the major
exports under this category were refined sugar (170199), and other portland cement (252329).
4 Extent of Trade Liberalization: Analysis from Sri Lankan Data Source
4.1 Imports from India
4.11 Sri Lanka’s imports from India under Different Categories
This section makes an attempt to analyze Sri Lanka's imports under different categories
of concessions offered under the ILFTA. For the FY 2001-02 the total number of items (by 6 digit HS
codes) imported from India was 3825. These bilateral import items are analyzed in terms of 21 HS
sections with the distribution of trade under each concession category followed by the analysis of the
top import products under each category.
Sri Lankan trade data is reported on the basis of calendar year and Indian data is on the
financial year basis. In order to gain compatibility, Sri Lankan data was converted to the same duration
of the Indian financial year, which is April 1st to March 31st.
Table 7: Sri Lanka's Per cent Share of Imports of Products under Different Categories in Total
Bilateral Imports Offered Concessions, 1996-02
Categories
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Bilateral Total imports
586831.49 575423.06 518018.13 528751.15 640183.26 720561.10
(USD'000)
50.59
47.01
44.10
43.55
38.13
48.75
0.85
0.85
1.11
0.81
0.86
0.59
50% Duty Reduction List
12.64
14.13
11.91
12.25
12.11
13.99
Residual List
35.92
38.02
42.86
43.36
48.88
36.67
All Categories
100.00
100.02
99.99
99.97
99.98
100.00
Negative List
Zero Duty List
Notes: Sri Lankan data is adjusted for the Indian financial year i.e. April 1st-March 31st
Share of different categories is given as a percentage of total exports
Source: Compiled using Sri Lanka Customs Data
18
Chart 5: Sri Lanka's Share of Imports (%) of Products under Different Categories in total
Bilateral Imports Offered Concessions, 1996-02
60
Percentage share
50
40
30
20
10
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Negative List
50% Duty Reduction List
Zero Duty List
Residual List
Table 7 presents the level of bilateral import liberalization in Sri Lanka under the ILFTA and
chart 5 graphically presents the same. Highest import share was under the Negative list in FY 200102. The share of the negative list declined since 1996-97 and took an upward trend in FY 2001-02. The
next highest traded category under the FTA is the residual list items, of which the percentage share
increased continuously from FY 1996-97 to 2000-01 and in FY 2001-02 it declined. It contributed 35.9
per cent in FY 1996-97 and increased steadily up to FY 2000-01 (48.9 per cent) and after the ILFTA
came into force it declined to 36.7 per cent in FY 2001-02. The 50 per cent duty reduction category
also contributed significantly (13.9 per cent in FY 2001-02) to the total imports from India.
Meanwhile, the most restricted items under the ILFTA, represented by the Negative list, declined
steadily since FY 1996-97 from 50.6 per cent to 38.1 per cent in 2000-01. But, in the second year of
the FTA the share increased to 48.7 per cent. Comparatively, Sri Lanka has restricted more items from
Free trade than what India has restricted (48.7 per cent in Sri Lanka vis-à-vis 1.2 per cent in India)
4.12. Sri Lanka’s Export to India in Relation to World Export under Different Categories
The table below shows the performance of the top fifty products in Sri Lanka’s total bilateral imports.
19
For all categories the concentration of imports on the top 50 products is evident. Highest concentration
is in the zero duty category (93.60 per cent) followed by the negative list (87.36 per cent) and 50%
duty reduction list (81.23 per cent). During the six year period under consideration, the share of all the
categories has increased and the increase during the post FTA period is significant especially in the top
50 products under the zero duty category, 50% duty reduction category and the negative list items.
Table 8: Sri Lanka’s Bilateral Import Value and Per Cent Share in World Imports of Top 50
Products under Different Categories: 1996-97 to 2001-02
Categories
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Bilateral Total Imports
(USD’000)
586831.49 575423.06 518018.13 528751.15 640183.26 720561.10
Zero Duty
75.95
79.86
87.28
85.98
84.06
93.60
50% Duty List
63.85
59.47
60.77
62.58
69.23
81.23
Residual List
57.33
54.87
53.97
57.44
64.29
64.89
Negative List
60.83
77.97
69.57
79.02
77.58
87.36
Notes: Sri Lankan data is adjusted for the Indian financial year i.e. April 1st-March 31st
Share of different categories is given as a percentage of total bilateral imports
Source: Compiled using Sri Lanka Customs Data
Chart 6: Sri Lanka's Import Share of Top 50 Products in World Imports under Different
Categories: 1996-97 to 2001-02
Percentage Share
100
80
60
40
20
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Category
Zero Duty
50% Duty List
Residual List
20
Negative List
4.13 Sri Lanka's Imports of Products under Different Categories of HS Section Classification
Annex 16 presents Sri Lanka's imports of different categories offered concessions to India by
HS sections. It is evident that the share of the Negative List has declined continuously from USD 296.8
million in FY 1996-97 to 244.09 million in 2000-01, a decline of 30.27 per cent. And it took an
upward move in 2001-02. Under this category, Vegetable products (section 11) constituted the largest
group recording 29.30 per cent, followed by prepared food items (section IV) with a share of 21.37 per
cent and mineral products (section V) with 14.41 per cent.
Under the Zero Duty list of Sri Lanka the highest contribution was from chemical products
(section VI) with 97.8 per cent. The total exports under zero duty remained almost the same from
1996-2001. Meanwhile, the performance of machinery and mechanical goods sector has continuously
stagnated with insignificant contribution. Zero duty was granted on 319 items (by 6 digit HS codes),
upon entry into of the agreement, which were on raw materials and machinery industries.
Products under this category will be liberalized up to 70 per cent at the end of the 1st year, up to
90 per cent at the end of the 2nd year and 100 per cent at the end of the 3rd year. The overall
contribution of this concession category has increased steadily over the past few years, while the sub
sections also experienced a rapid growth. The largest percentage increase was from FY 2000-01 to FY
2001-02 with an overall growth rate of 30 per cent. In this category, machinery and mechanical goods
(section XVI) contributed the highest share with 52.5 per cent in FY 2001-02, largest share obtained
since FY 1996-97, followed by base metal (section XV) with 37.3 per cent. However, the growth rate
of bas metal and chemical product sections recorded a declining rate of growth. .
The most important product group under Sri Lanka’s Residual List as per data of FY 20001-02
is section XI (textile items), which contributed 39.3 per cent, followed by section VI (Chemical
Products) which contributed 20.3 per cent to the total imports under the of the residual list. Majority of
the sections under this category contributed less than one per cent in the year 2001-02, viz. sections II,
III, VIII, IX, XII, XIV, XIX, XX, XI. This implies that most imports under the residual list have not
yet become responsive to the concessions offered under the ILFTA. Products under this category will
be liberalized by 35 per cent before the end of the 3rd year, 70 per cent before the end of the 6th year
and 100 per cent before the end of the 8th year.
4.14 Product-wise Analysis of Sri Lanka's Imports from India
21
Under this section each concession category is analyzed in terms of the top fifty import items
(by 6 digit HS codes).
Annex 17 presents Sri Lanka’s imports of top fifty products offered
concessions under zero duty from India. Among the top fifty products imported from India under the
Zero Duty list, the most responsive products in the FY 20001-02 was other antibiotics with the import
value of USD 1.07 million (79 per cent of the total imports of the product), followed by Penicillin and
other derivatives with USD 0.3 million worth of imports (44 per cent of the total imports of the
product) and trichoroacetic acids, which carried a 99 per cent import share.
India was the sole supplier of Erythromycin and its derivatives to Sri Lanka with a import share
of 100 per cent in FY 2001-02. Among the other items that were largely imported from India as against
the rest of the world was Dichlorodifluoromethane (99.4 per cent), Dichlorodifluoromethane of
methylene chloride (93.1 per cent), Diethyl ether (92.1 per cent), and other cyclic aldehydes (90.7 per
cent). Except for few items, most of the items under the top fifty products were continuously imported
from India since 1996. It is also evident that the rate of growth of 28 products among the top fifty
recorded a positive growth rate from FY 2000-01 to 2001-02.
Annex 18 presents Sri Lanka’s imports of top fifty products from India offered concessions
under Residual List. In FY 2001-02, the highest import items under the Residual list was other
medicaments (USD 29.6 million), oil cake and other solid residues (USD 15.7), followed by cotton
yarn measuring 714.29 decitex or more (USD 11.7). The data tends to suggest that from FY 1999-00
the rate of growth of imports for most of the items recorded a positive rate of growth except for 5
negative items, as against 29 negative growth items from FY 2001-02.
Among the top fifty items under this category, track suits of Manchester Metropolitan Uni.made fibre, track suits of other textile material, cotton yarn measuring 714.29 decitex but not less than
232.56 decitex, plain weave woven cotton fabrics, other slag and ash, cotton track suits and carpets
recorded a import share of over 90 per cent vis-à-vis rest of the world imports in FY 2001-02. Despite
this, for 29 product items, India’s share as a percentage of the total imports from the world recorded a
negative rate of growth from FY 2000-01 to 2001-02.
Annex 19 lists Sri Lanka’s imports of top fifty products from India offered concessions under
50% Duty Reduction. Under this category 889 items (by 6 digit HS code) were granted 50 per cent
duty reduction upon entry into force of the agreement, followed by phased out removal of tariffs up to
70% at the end of the 1st year, up to 90% at the end of the 2nd year and 100% at the end of the 3rd year.
Among the top 50 import products under consideration, the highest exported items for FY 2001-02
22
were other generating sets, other parts of turbo-jets, carbon, other welded iron of circular cross-section,
and other semi-finished iron or non-alloy steel. The growth rate of the top 50 items from FY 2000-01
to 2001-02 even after the import liberalization in 2000 reveals a dismal scenario with 23 items (among
the top 50) having a negative import growth rate.
India was the main supplier for several products during the FY 2001-02, especially ferro-alloys
containing carbon by weight more than 2% (99.3 per cent), other Ferro-manganese (98.5 per cent),
other generating sets (93.5 per cent), flat-rolled products of iron of the thickness of less than 0.5 mm
(91.4 per cent), vis-à-vis rest of the world. For 36 items (out of the top 50) India's share of imports visà-vis the rest of the world increased during FY 2000-01 to 2001-02.
Annex 20 lists Sri Lanka’s imports of top fifty products from India under Negative List. Most
restricted items under the agreement are presented in this annex. The highest imported items under the
negative list of Sri Lanka for FY 2001-02 was other raw sugar not containing added flavoring, other
Portland cement, onions and shallots, fruits of the genus capsicums, petroleum oils etc. The import
share of India for some import items under this category is significantly high especially with regard to
ground-nuts (100 per cent), other vegetable products (99.9 per cent), fruits of the genus capsicums
(99.6 per cent), turmeric (99.4 per cent), and chassis fitted to engines of motor vehicles (93.9 per cent).
4.15 Trade Creation/Diversion in Sri Lanka’s Imports from India
It is often lamented that the cheap Indian imports have flooded the Sri Lankan market especially after
the ILFTA. With clear evidence that the imports from India has grown after the agreement came into
force, it has to be analyzed whether this increase is with a lower or higher unit cost in relation to the
imports from the rest of the world. In case of the former, there would be trade creation whereas in case
of the latter, there would be trade diversion. This exercise has been done for all products whose
imports increased over the two year post-liberalization period beginning 1999-00.
Annex 21 presents the results of this analysis. The results point to overall trade creation of USD 25.30
million as a result of trade liberalization. The trade creation arises mainly from increased imports in the
residual list category (USD 17.29) million and zero duty category (USD 8.74 million). Only category
that recorded trade diversion was in the 50% duty reduction category where the values was USD 0.73
million. Trade creation is evident in a very significant manner in the residual list items, where, other
fish, dried, salted or in brine, oil-cake and other solid residues, cement clinkers and other slag and ash
23
contributed 68.42 per cent of the trade created under this category (as a percentage of the total trade
created under the category). With regard to the zero duty items, mono-, di- or trichloroacetic acids,
penicillins and their derivatives with apenicillanic acid structure, diethyl ether, other cyclic aldehydes
without other oxygen function were the top items (98.45 per cent) that contributed to the trade creation
in this category. Import under this category is highly concentrated among few products, mono-, di- or
trichloroacetic acids alone contributed to 90.61 per cent of the trade created. In the 50% duty reduction
category, photosensitive semiconductor devices, food grinders and mixers, other generating sets and
generating sets with compression-ignition internal combustion piston engines were the top items that
recorded the highest trade diversion.
4.2 Sri Lanka’s Exports to India
4.21 Sri Lanka's Exports to India under Different Categories
This section makes an attempt to analyze Sri Lanka's exports under different categories of
concessions offered under the ILFTA. For the FY 2001-02 the total number of items (by 6 digit HS
codes) exported to India were 616. These bilateral export items are analyzed in terms of 21 HS sections
with the distribution of trade under each concession category followed by the analysis of the top export
products under each category.
Table 8: Sri Lanka's Bilateral Exports and PerCent Share of Different Categories of Products
Offered Concessions in Total Bilateral Exports, 1996-02
Categories
Bilateral Total exports (USD'000)
Zero Duty
1996-97
1997-98
1998-99 1999-00
2000-01
2001-02
49651.09 34943.70 38368.22 46428.48 59426.00 97815.10
15.65
11.01
6.69
7.43
21.90
27.12
2.35
4.14
4.58
7.61
8.50
3.37
Negative List
19.80
28.79
3.43
5.42
2.28
1.16
Residual
64.07
59.27
76.55
70.23
52.71
61.62
Tea
0.54
3.78
3.68
4.75
6.60
1.78
Garments
0.16
0.44
0.46
0.21
0.25
0.16
102.56
107.43
95.39
95.65
92.23
95.22
Textiles
All Categories
Notes: Sri Lankan data is adjusted for the Indian financial year i.e. April 1st-March 31st
Share of different categories is given as a percentage of total exports
Source: Compiled using Sri Lanka Customs Data
24
Chart 7: Sri Lanka's per cent Share of Exports of Products under Different Categories in
Bilateral Exports Offered Concessions, 1996-02
90
80
Percentage Share
70
60
50
40
30
20
10
0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Zero Duty
Textiles
Negative List
Residual
Tea
Garments
Table 8 presents the level of Sri Lanka's export liberalization in India under the ILFTA and
Chart 7 presents the same graphically. Sri Lanka's total exports are classified according to the
concession categories. From FY 1996-97 to FY 2001-02, total exports to India increased steadily. The
largest contribution was recorded from the Residual list where the contribution was over 50 per cent
since FY 1996-97. After the ILFTA came into force the share increased from 52.7 per cent in FY
2000-01 to 61.6 in FY 2001-02. The second highest contribution came from the Zero duty category.
The share of this category increased rapidly after 1999-00 where the export share as a percentage of
total exports was 7.43, this increased to 21.9 in FY 2000-01 and to 27.12 in FY 2001-02. A significant
fact in the composition of exports is the rapid decline in the contribution of the Negative list items to
the total export. It dropped from 19.8 per cent in FY 1996-97 to 1.6 per cent in FY 2001-02. In this
context, only 1.2 per cent of the total exports to India was excluded from free trade (98.8 per cent of
Sri Lanka's exports to India is subject to free trade).
4.22 Sri Lanka’s Exports of Top fifty Products under Different Categories in Relation to World
Exports
Sri Lanka’s exports of top fifty products as a share of the total bilateral exports in each category
receiving concessions have been place in table 9. Similar to the imports, the high concentration of
exports in the top fifty products is evident in exports as well. For zero duty category, residual list,
25
textiles and the negative list the share is over 90 per cent. This signifies that Sri Lanka exports almost
over 90 per cent of items under these categories in the top 50 items. On the other hand, poor
performance of the tea and garments were recorded continuously for the six years under consideration.
The performance of the top fifty items under zero duty and residual list has significantly increased after
the ILFTA came into force. On the other hand the share of the top exports under the negative list,
despite the fact being excluded from concessions, the share increase is remarkably significant.
Table 9: Sri Lanka’s Bilateral Export Value and Per Cent Share in World Exports of Top 50
Products under Different Categories, 1996-02
Categories
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Bilateral Total Exports (USD ‘000) 49651.09 34943.70 38368.22 46428.48 59426.00 97815.10
Zero Duty
38.64
63.68
86.01
90.22
98.17
99.70
Residual List
57.19
77.50
89.25
94.43
92.73
96.50
Tea
0.54
3.78
3.68
4.75
6.60
1.78
Textiles
68.65
69.16
70.24
87.66
96.24
99.84
Negative List
44.21
41.65
44.88
57.18
68.90
92.70
Garments
0.05
0.10
0.16
0.06
0.15
0.16
Notes: Sri Lankan data is adjusted for the Indian financial year i.e. April 1st-March 31st
Share of different categories is given as a percentage of total bilateral imports
Source: Compiled using Sri Lanka Customs Data
Percentage Share
Chart 8: Sri Lanka's Export Share of Top 50 Products in World Exports under Different
Categories: 1996-97 to 2001-02
100.00
80.00
60.00
40.00
20.00
0.00
1996-97
1997-98
1998-99
1999-00
2000-01
Category
Zero Duty
Residual List
Tea
Textiles
Negative List
Garments
26
2001-02
4.23 Sri Lanka's Exports of Products under Different Categories by HS Section Classification
Annex 22 presents Sri Lanka’s exports of different categories offered concessions by India by
Hs sections. It is evident that the exports offered concessions under the Zero duty have increased
steadily since 1997-98. On the Indian side 1351 items (by 6 digit HS codes) were granted duty free
upon entry into force of the agreement. The rate of growth of exports under this category recorded a
significant growth rate of 277 per cent in 2000-001 followed by a 103 per cent in 2001-02. Highest
contribution was from mineral products (63.4 per cent), paper products (21.8 per cent) and machinery
and mechanical goods (12.8 per cent). Other sections contributed insignificantly.
Textile items that came under a fixed tariff rate of 25 per cent on 528 products (all Textile
items in Chapters 51, 52, 58, 59, 60, 63 and a majority of Textile items in Chapters 53-56 of the HS
code), contributed marginally to the total exports, with a decline of 34.7 per cent in FY 2001-02.
Textile articles (section XI) contributed 99.9 per cent, while footwear (section XII) contributed only
0.1 per cent.
The share of the Negative list declined steadily since FY 1998-99. Under this category the most
important is paper products (section X) with a contribution of 51 per cent and prepared food items
(section IV) with a share of 45.4 per cent. The only section that recorded a growth in FY 2001-02 was
paper products (section X), while all other sections had a negative growth rate during this period.
Meanwhile plastics and rubber products (section VII), with an export share of 32.9 per cent declined to
0 per cent in FY 2001-02.
Largest number of items received concessions from India under the Residual list. Under this, 50
per cent duty reduction of tariffs on 2799 items upon entry into force of the agreement followed by
phased out removal of tariffs up to 100 per cent in 2 stages within 3 years. Majority of the export items
comes under the Residual list and during FY 2001-02 the rate of growth in exports under this category
increased by 92 per cent. Vegetable products (section II) contributed 65.8 per cent which was the
highest contribution followed by 19.3 per cent from base metal (section XV). All other sections under
this category contributed less than 5 per cent.
The other two categories of exports – tea (50 per cent fixed tariff concessions) and garments
(50 per cent fixed tariff concessions)- have contributed marginally to total exports. Both tea and
garments, which are quota items, have experienced several practical problems and thereby the quotas
have been under-utilized. In case of tea a 50 per cent tariff concession for import of tea from Sri Lanka
on a preferential basis has been offered by India subject to an annual maximum quota of up to 15
27
million kg (tariff lines 090210, 09220, 09230, 09240, 210120). With regard to Garments, a 50 per cent
fixed tariff concession for imports of Garments from Sri Lanka (under HS Chapters 61 and 62 while
remaining in India's Negative List) has been offered by India subject to a maximum annual quota of 8
million pieces of which a minimum of 6 million pieces should contain Indian fabrics.
4.24. Product-wise Analysis of Sri Lanka's Exports Offered Concessions by India
Under this section each concession category is analyzed in terms of the top fifty import items
(by 6 digit HS codes). Annex 23 presents the top fifty export items under Zero Duty category. It is
evident in FY 2001-02 after the implementation of the ILFTA, about 22 new products (under 6-digit
HS code) were introduced under this category, signifying export diversification. Among the top 50, the
most responsive items for the same period was naphthalene, unbleached craft paper, other automatic
data processing machines and other recovered paper or paperboard. The performance in FY 2001-02
for most products was highly satisfactory with significant growth rates.
India was the sole destination with 100 per cent exports being sent with regard to several
products. Unbleached craft paper, phosphates of trisodium, other epoxides, other non-electric
typewriters, other machine tools for drilling, other aromatic polycarboxylic acids, mechanical wood
pulp and imines and their derivatives were solely exported to India. Most of the products of the top 50
experienced positive growth rate in FY 2001-02. This category could be regarded as one of the most
successful duty categories that Sri Lanka has taken advantage under the agreement.
Annex 24 lists Sri Lanka’s top fifty textile products offered concessions by India. Under this
category, the most responsive for FY 2001-02 was wadding of textile materials of man-made fibres,
other dyed fabrics, dyed woven fabrics of synthetic filament yarn, non-wovens weighing more than 25
g/sq.m but not more than 70 g/sq.m and woven labels. In addition, there were 18 new textile products
introduced in FY 2001-02 that was not exported previously. Substantial growth in trade was recorded
for many products, but India’s share as an export destination vis-à-vis rest of the world does not appear
to be attractive. For many items India’s share as a percentage of the total exports received a low share.
Annex 25 presents Sri Lanka’s top fifty exports to India under the Negative List. The largest
exports under the Negative list for FY 2001-02 was other coconuts, copra, waste of plastics, tube
fittings, flexible other plates and self-adhesive plates. The growth in exports under this category did
not record significant progress over past years, while in FY 2001-02 the rate of growth in exports with
regard to many products that were exported previously experienced a negative growth. Meanwhile,
28
India’s share for almost all products witnessed a lower share, conveying the low export penetration of
these Negative list items in the Indian market.
Annex 26 presents Sri Lanka’s top fifty exports to India under the Residual List. The most
responsive exports under this category was cloves, uncrushed pepper, other waste and scrap of alloy
steel, other refined copper and glycerol. The export performance of the top fifty products recorded
significant progress in FY 2001-02. Meanwhile, exports to India vis-à-vis rest of the world
significantly high with about 22 products recording a share over 90 per cent.
Annex 27 presents Sri Lanka’s exports of tea to India. Of the five items under this category
only four items were exported to India in FY 2001-02 and of this only fermented black tea recorded a
growth for the same period. India’s export share as a percentage of the total exports for all these items
was below 0.5 per cent. Therefore, it is evident that the trade liberalization has not positively affected
tea sector.
Annex 28 presents Sri Lanka’s Exports of Garments to India. Of the total items granted
concessions under this category, only 24 items were exported to India in FY 2001-02, the highest
exports recorded were in men’s and boys cotton shirts knitted or crocheted, cotton briefs and panties,
cotton slips and petticoats of women and T-shirts. Exports to India as a percentage of the total exports
of these items remained insignificant throughout the period under consideration.
5. Assessments of Sri Lanka's Exports under the ILFTA
It is important to note that all the exports to India which are qualified for concessions under the
ILFTA, in practice do not obtain these benefits/ tariff concessions due to numerous practical problems
such as special documentation involved in obtaining the Rules of Origin Certificate, lack of awareness
on the eligibility of concessions, higher concessions offered under a different Agreement (such as
SAPTA, Bangkok Agreement) are some of the impediments encountered by the exporters to India
under the ILFTA (also see the survey results conducted by IPS for an extended description and
quantitative evaluation of problems of the FTA). In this regard total bilateral exports that are qualified
for duty concessions remain greater than the exports under the ILFTA. Ideally, these two variables
should be equal.
Table 10: Section-wise Distribution of ILFTA Exports (Values in USD)6
29
Section
Section Description
I
II
IV
V
VI
VII
VIII
IX
X
XI
XII
XIII
XIV
XV
XVI
XVII
XVIII
XX
XXI
Live animals and animal products
Vegetable products
Prepared food items
Mineral Products
2000-01
Chemical products
Plastics and rubber
Leather products
Wood products
Paper products
Textile articles
Footwear
Stone, plaster, cement
Pearls
Base metal
Machinery & Mechanical goods
Transport equipment
Optical, photographic equip.
Misc. Manufactured articles
Works of art
Total
% Share
2001-02
18.61
1381.55
790.03
0.00
155.66
19.89
0.00
0.29
5354.46
74.05
17.27
291.82
3.15
2181.95
1490.22
24.94
4.87
226.37
13.45
0.16
11.47
6.56
0
1.29
0.16
0
0.00
44.44
0.61
0.14
2.42
0.03
18.11
12.37
0.21
0.04
1.88
0.11
12048.58
100
% Share
0.00
1665.29
196.23
162.49
786.79
17.68
217.76
0.00
4119.47
348.14
38.80
1438.73
20.67
7586.81
2403.25
81.75
7.21
946.60
9.72
20047.37
% Growth
0.00
8.31
0.98
0.81
3.92
0.09
1.09
0.00
20.55
1.74
0.19
7.18
0.10
37.84
11.99
0.41
0.04
4.72
0.05
100
-100.00
20.54
-75.16
405.46
-11.12
-100.00
-23.06
370.17
124.63
393.02
556.90
247.71
61.27
227.79
47.85
318.16
-27.73
Note: Sri Lankan data is adjusted for the Indian financial year, I.e. April 1st -March 31st
% Share refers to the share of each section as a percentage of the total ILFTA exports for the particular year
% Growth refers to rate of growth from 2000-01 to 2001-02
Source: Compiled using Sri Lanka Department of Commerce Rules of Origin Certificate Data
In table 10, total exports under the ILFTA are classified under HS sections. Total export value
increased from USD 12.05 million in FY 2000-01 to USD 20.05 million in FY 2001-02, a growth rate
of 66.4 per cent. The highest contribution in FY 2001-02 was from base metal (37.8 per cent), paper
products (20.5 per cent), and machinery and mechanical goods (11.9 per cent). A significant factor that
should be emphasized is the introduction of new export areas such as mineral products and leather
products in FY 2001-02. It is evident that the performance in the second year of operations has
recorded significant growth rates in almost all the sections. Despite this, out of the 21 sections 10
sections still contribute less than 1 per cent to the total exports under the agreement, which implies a
low level of utilization and penetration into the Indian market. Meanwhile live animals and wood
products that were exported on a very low level in the first year were completely stopped in the second
year.
Table 11: Top Twenty-Five Items Exported under the ILFTA Exports (Values in USD)
HS code Description
740319
2000-01
Other Refined copper:
2001-02
0
30
2857967
%
Concession Category
Growth
Residual list
470710
847190
680221
470790
130190
720429
740400
780199
847100
841850
940380
740721
481940
740321
90240
300490
940600
470730
740700
740729
691110
90700
420212
847330
Unbleached kraft paper or paperboard or
corrugated paper or paperboard
Other digital automatic data processing
machines:
Marble, travertine and alabaster
Other, including unsorted waste and scrap
Other Lac; natural gums, resins, gum resins
and oleoresins (for example, balsams).
Other Waste and scrap of alloy steel:
Copper waste and scrap.
Other Unwrought lead.
Automatic data processing machines, not
elsewhere specified or included.
Weighing machine weights of all kinds;
parts of weighing machinery:
Furniture of other material, including
cane,oiser, bamboo
Copper bars of zinc base alloys
Other sacks and bags, including cones:
Copper-zinc base alloys (brass)
Other black 50% fixed tariff concession on
tea (fermented) and other partly fermented
50% fixed tariff concession on tea:
Other Containing hormones or other
products of heading 29.37 but not
containing antibiotics :
Prefabricated buildings
Paper or paperboard made mainly of
mechanical (for example, newspapers,
journals and similar printed matter)
Copper bars, rods and profiles.
Other copper bars
Tableware and kitchenware
Cloves (whole fruit, cloves and stems) :
With outer surface of plastics or of textile
materials
Other trailers and semi-trailers for the
transport of goods:
4548444
2284268
-49.78 Zero duty (Annexure E)
215405
1194011
454.31 Zero duty (Annexure E)
136919
519717
62961
1177771
1109729
838874
760.20 Residual list
113.53 Zero duty (Annexure E)
1232.37 Residual list
257969
1049511
104344
224885
720207
630177
556539
548959
179.18 Residual list
-39.96 Residual list
433.37 Residual list
144.11 Residual list
732463
434614
-40.66 Zero duty (Annexure E)
121976
425251
248.63 Residual list
0
46218
879448
404840
363906
359879
352740
Residual list
687.37 Zero duty (Annexure E)
Residual list
-59.89 50% fixed tariff
concession on tea
124461
287655
131.12 Residual list
0
161795
264800
263075
0
0
75858
0
0
250462
229913
215462
201438
195715
Residual list
Residual list
184.03 Residual list
Residual list
Residual list
0
174349
Residual list
Residual list
62.60 Zero duty (Annexure E)
Notes: Sri Lankan data is adjusted for the Indian financial year i.e. April 1st-March 31st
Sorted as per values in 2000-02
Concession category refers to different concession categories under the ILFTA.
Source: Compiled using Sri Lanka Department of Commerce Rules of Origin Certificate Data
Table 11 presents the top 25 items exported under the ILFTA. The most responsive export
items under the ILFTA for FY 2001-02 was other refined copper, unbleached craft paper or paper
board, other digital automatic data processing machines, marble, other unsorted waste and scrap and
other lac. The rate of growth for most products recorded high positive rates, while the largest rate was
recorded for other lac, marble, other sacs and bags, other digital automatic data processing machines
and other unwrought led. Of the top 25 export items under the ILFTA, most of the products were
31
exported under the Residual list, while most of the highest growth items were also exported under this
category.
It is evident that among the top 25 in FY 2001-02, eight items that were not exported under the
ILFTA at the year of commencement, were introduced. Despite the diversification of the export base
under the agreement, the exports that go under the agreement still remain significantly low vis-à-vis
total bilateral trade to India. . Therefore, it is important to look into the reasons and impediments
hindering trade under the agreement despite the trade liberalization.
5.1 New Products Introduced to Sri Lanka’s Exports under ILFTA
Annex 29 lists new products introduced to Sri Lanka's Exports under the ILFTA. In FY 200102, which is the second year of operations of the ILFTA, there were 67 new products (by 6 digit HS
codes) introduced under the ILFTA. These items were not exported under the agreement in 2000. Out
of the 67 new products, 24 products were not bilaterally traded before the agreement (Which is 34 per
cent of the new items). This is a remarkable sign of export diversification of Sri Lankan exports to
India. Among these 67 new products that entered the ILFTA in 2001-02, 43 items were previously
traded bilaterally but were not exported under the ILFTA. Out of these previously traded bilateral
items, 13 products were exported 100 per cent under the ILFTA.
6. Questionnaire/ Interview Survey
6.1 Institute for Policy Studies, Colombo
6.1.1. Objective of the Survey
To evaluate the role of different interest groups in promoting or causing resistance to the
implementation of the agreement.
6.1.2. The Survey Methodology
The survey was based on a structured questionnaire7 prepared by the Institute of Policy Studies.
The target population is the stakeholders of the ILFTA: Importers, Exporters, Investors, government
Officials, financial institutions and other relevant officials of the agreement. The process was designed
to be as straightforward as possible. The fieldwork of the survey, i.e. conducting one-to-one interviews
were subcontracted to an international market research agency, Org-Marg Smart (Pvt) Ltd (OMS).
Contact with the target stakeholders was initially made through a letter of introduction and explanation
of the purpose of the survey by the Institute of Policy Studies through OMS and then the field
researchers followed up, making an appointment by telephone for one-to-one interview. The field
32
researcher in most interviews distributed the questionnaire and the respondent himself completed the
same. In few interviews the respondent answered while the researcher noted down the relevant
information.
6.1.3. Sample Selection and size
The total sample size is 97 and the breakdown is given in the table below.
Sample category
Number interviewed
Exporters
32
Importers
39
Investors
9
Government Officials
4
Financial Institutions
9
Other Officials
4
TOTAL
97
It was important to ensure that the highest quality data possible is returned. This means that the
information for the questionnaires had to be obtained from the most senior managers possible in each
segment. 91% of respondents were senior line managers (such as Plant Manager, Marketing Manager
or Export Manager) or higher.
6.1.4. Procedure for selecting respondents for the Sample
The formulation of the sample and the list of addresses were designed by IPS and handed-over
to OMS for the fieldwork. A 50% non-response rate was assumed and thereby twice as many
companies as the required sample were identified to ensure that a sample as close as possible to the
desired sample was obtained. Initially a sample of 150 was decided, but this came down to 97 as a
result of high non response rate (unwillingness by the respondents to give an appointment and thereby
no progress could be made with regard to the same)
6.1.5. Questions and layout of the questionnaire
The questions were selected to ensure that the objectives set for the survey would be fully
achieved.
An important factor in ensuring a good response rate is ability to convince the target group that
they will eventually benefit from this exercise and the neutrality of the body/person issuing it to ensure
respondents will be satisfied that their confidentiality will be protected. The covering letters for the
33
survey were issued by IPS. The letters explained the survey, its objectives and the importance of this
information for future policy formulation and to strengthen the ILFTA. The letter also assured
confidentiality of the information provided by every respondent.
The questionnaire was designed to be as straightforward and short as possible to ensure good
response rates, with most of the information to be cleaned by simply checking boxes to indicate
ranking of the advantages or disadvantages on a Likert scale8.
In addition to the general use of Likert scales in the questionnaire, some questions were framed
to allow multiple responses to a range of categories and some were framed to allow free text answers.
The multiple response format was used where number of responses might apply, for example,
questions such as “Have you received tariff concessions under the ILFTA? (tick appropriate boxes)”.
Here the respondent can select the appropriate answer from different options. By using the Likert scale
for the advantages and disadvantages of the ILFTA, it enabled us to quantify all the responses by
different stakeholder groups on a common scale. On the other hand, a question like “what are your
recommendations for the improvement of the ILFTA?” requires multiple answers or suggestions. The
free text format was used in several places as most of the questions required open-ended answers.
The use of this structure also facilitated subsequent data entry and analysis.
6.1.6. Data collection, Coding and Analysis
The interviews were conducted by OMS with the direct supervision of IPS. The data on the
questionnaires were collected on one-to-one basis, coded and formatted for a database set up in SPSS.
The schedule of data entered were checked for missing entries and any other inconsistencies and then
crosschecked against the original questionnaire. Analysis was carried out using statistical analysis
package STATA and for simpler calculations Microsoft EXCEL was used.
Where insufficient responses were provided to particular questions, the responses were
excluded from the analysis (also non-responses).
6.1.7. Analysis of Survey Results
Interview responses with each stakeholder group will be analyzed separately in the following section.
(a) Exporters
The sample selected for exporters were from the top 100 exporters under the ILFTA and out of
the 100 the actual sample of 32 was selected randomly. Out of the total interviewed (32), there were 19
exporters who had started exporting to India, before the ILFTA came into force in March 2000 and the
balance 13 were new entrants to the Indian market.
34
In order to assess the reasons behind exporting to India, the response sheet listed a number of factors.
The responses indicated that the single strongest reason for exporting to India was to access the huge
Indian domestic market. Forty five per cent stated this as their primary reason, followed by the
proximity factor, with 20 per cent, tariff concessions under the ILFTA (12 per cent) and mutual
agreement with joint venture partners to deal with India (12 per cent) were also ranked with high
importance.
With an operational period of three years, ILFTA initially encountered several practical
problems in several areas. A set of questions were intended to identify the critical problems associated
with the agreement and thereby find appropriate policy recommendations. Among the exporters that
were interviewed, 25 respondents claimed (78 per cent) that they have experienced problems with the
agreement as opposed to 30 per cent of importers who had not experienced any problems.
The single most pressing problem experienced by the exporters was with regard to customs
procedures, which recorded 34 per cent of the total responses. Twenty three per cent was attributed to
administrative delays and 7.69 per cent to non tariff barriers and another 7.69 per cent to the ad-hoc
increase in Indian domestic taxes.
Regarding advantages of ILFTA for the exporters, except for the average rating for efficiency
of the BOI as a facilitator of investment, all other factors were rated as having medium advantage.
Advantages such as access to the Indian domestic market, opportunity to diversify the export base and
joint venture creation were skewed towards the upper-end of medium advantage while creation of
linkages and the extent of the Free Trade Secretariat were skewed towards the lower-end of medium
advantage. Efficiency of the BOI as a facilitator of investment carried an average rating of 3.75,
indicating high advantage, with 6 respondents rating it as a very high advantage.
Most of the average ratings for the disadvantages for exporters were concentrated as having
medium disadvantages. Problems with customs procedures in India carried a average of 2.00 indicating
a high disadvantage, while 18 of the respondents stated it as a very high disadvantage. Efficiency of
the BOI, extent of assistance from the Free Trade Secretariat and excessive documentation were rated
as low disadvantages in the operations of the ILFTA.
The survey results indicated that out of the total respondents (32), 17 exporters (53 per cent)
had plans to expand their present operations in India, while 4 exporters did not have any positive plans
and 4 people did not respond to this question. This indicates that the majority of the existing exporters
have positive plans of expansion and thereby the potential for indo-Lanka trade expansion is very high.
35
Number of respondants
Medium term plans of the Exporters to Expand operations in India
20
15
10
5
0
companies that have plans to
invest (expand) in India in the
medium term
companies that do not have
plans to invest (expand) in
India in the medium term
Not responded
Sixty five per cent of the respondents (21 respondents) rated ILFTA as successful in supporting
their export activates, while 21 per cent was negative comments. In other words, majority of the
exporters have utilized the tariff concessions.
No. of respondents
Overall success of the ILFTA – as Rated by Exporters
25
20
15
10
5
0
ILFTA as a whole is
successful/supportive for the
performance of the
organization
ILFTA as a whole is NOT
successful/supportive for the
performance of the
organization
Not responded
Highest number of recommendations by exporters for improvement of ILFTA was to re-negotiate
ILFTA, resolve problems pertaining to Indian customs and to make ILFTA aware to the business
community. Each of the recommendations received 6 responses. Other important recommendations
were to address the problematic areas of the agreement and to streamline administrative procedures
and documentation.
In order to assess the degree of participation of the exporters in the formulation of the agreement
the questionnaire tried to inquire whether the exporters were consulted before the agreement was
signed. Out of the total number of respondents only 12 per cent (4 respondents) were consulted before
the agreement, while 78 per cent were excluded. As the sample targeted the top players in the export
36
marker, this signifies the lack of communication of the government with the industry, which is vital in
a trade agreement in order to reap the maximum returns.
(b) Importers
Due to unavailability of data on the specific importers under the ILFTA, the survey on
Importers from India had to be limited to the general importers from India, out of which top 100 were
short listed, of which 39 were randomly interviewed. Out of this 39 interviewed, only 10 importers
received concessions under the ILFTA. In other words, only 10 actually imported under ILFTA or 74
per cent of the respondents did not receive concessions and they were importing under the general
tariff rates.
Out of the total importers interviewed (39), 37 importers had imported from India before the
ILFTA came into force in March 2000 and only 2 importers were new entrants.
The main reason for importing from India attributed by the importers is the low cost of imports
from India, which recorded 43 per cent of the responses. Close proximity, availability of goods and
quality factors secured 21 per cent, 12 per cent and 12 per cent, respectively.
Regarding the advantages of ILFTA of importing from India, the average rating for all the
factors were concentrated as medium advantage. A significant proportion of the respondents have not
responded to this set of questions. Opportunity for joint ventures with Indian companies was stated as
very high advantage by 9 respondents and the extent of assistance from the Free Trade Secretariat by 5
respondents. However 8 respondents considered the extent of assistance from Free Trade Secretariat
and 6 respondents considered efficiency of BOI as of low advantage
The highest disadvantage factor for importers was the problems pertaining to the customs
procedures in Sri Lanka, which received an average rating of 2.81 with 8 respondents rating it as a very
high disadvantage and another 8 rating as a medium disadvantage. Factors that were rated least
disadvantageous were non tariff barriers, delays in approvals in setting-up Indian officers in Sri Lanka,
Efficiency of the BOI as a facilitator of investment and the assistance from the Free Trade Secretariat.
Regarding the overall success of ILFTA the overall response for importers was low. Of the total
respondents, 13 have stated ILFTA as successful in promoting their business, while 11 importers were
negative about the agreement.
Overall success of the ILFTA – Rated by Importers
37
Number of respondents
16
14
12
10
8
6
4
2
0
ILFTA is successful
ILFTA is not successful
Not specified
Another question was posed to assess the degree of participation of the importers in the process
of formulating the agreement before it was signed. Out of the total number of respondents only 10 per
cent (4 respondents) were consulted before signing the agreement, while 74 per cent were excluded
and the balance 15 per cent did not respond. As the sample targeted the top players in the import
marker, this signifies the lack of communication between the government and the industry, which is
vital in a trade agreement in order to reap the maximum returns.
Important recommendations by the importers were to increase the concessions under the ILFTA,
to remove documentation problems and to increase awareness of the FTA among the industry players.
Some other recommendations such as to improve joint venture opportunities via ILFTA, formulation
of a national policy on FTAs, improving the efficiency of customs procedures are also important
recommendations that should be taken into account by the policy makers.
(c) Investors
A sample of 9 investors were selected among the top investors from India, of which, 3 were
joint ventures, 4 were 100 per cent Indian owned and 2 were specified as ‘other’. Out of the total 5
investors were involved in the manufacturing sector while 3 were involved in the services sector and 1
in the construction sector.
The highest motivating factors for investment decisions were the high demand in the Sri
Lankan market and the positive business environment, each of which were named by 4 investors. In
addition the duty concessions, close proximity and the BOI incentives and support services were
significant driving factors for investment decisions.
Motivating factors for investment in Sri Lanka
38
5
number of responses
4
3
2
1
0
High demand in
SL market
Positive
business
environment
Duty
concessions
Close proximity
BOI incentives
Personal links
and support
between the two
services
countries
Clear
investment
policies
Re-exporting
opportunity
Motivating factors
Note: Total number of motivating factors is not equal the number of respondents. single respondent had more than one
answer
Out of the five investors that are involved in manufacturing, only one has received concessions under
the ILFTA. As the agreement does not cover the services sector this concessions for other respondents
are not relevant. Not only the use of duty concessions by the eligible people but the use of the Indian
lines of credit is also very insignificant among the investors that were interviewed. Out of the nine
interviewed only 1 respondent was utilizing this credit line. On the other hand there is the issue of
these credit lines being specified for certain sectors per se.
Eight investors had positive plans for further expansion of the business operations and only one
had negative plans in this regard. Those who had positive plans intended to expand in the existing line
of investment area.
The response rate for queries relating to advantages of ILFTA for investors was not successful
owing to non-response rate of above 50 per cent for all factors. Out of those who responded, most of
the advantages were rated as medium advantages. The non-response rate for most factors was above 50
per cent and the analysis could not deliver a realistic picture for the investor segment. Out of those who
answered, most of the advantages were rated as medium advantages. In the sacle of very high
advantage, 3 respondents stated to the efficiency of BOI and 2 stated to the uutilisation of human
capital in Sri Lanka.
Responses to disadvantages of ILFTA for investors were comparatively satisfactory. Lack of
knowledge about ILFTA, inadequate marketing strategies and market research and Rules of Origin
39
criterion have been rated as factors that have very high disadvantage. Most of the factors were rated as
low disadvantage except for few that were rated as being of medium disadvantage.
There were some important recommendations brought forward by the investors for the
improvement of the ILFTA. Relaxing the regulations of the Reserve Bank of India towards foreign
investment, better commitment from the both governments, marketing of the FTA and awareness
building of the agreement, activities of the BOI to be strengthen in India and increase the number of
concessions.
(d) Financial Institutions
Seven leading Financial Institutions (FIs) were selected as the sample, out of which six were
commercial Banks and two were development banks. All these FIs engaged in lending for import
export purposes and have issued Letters of Credit for same. Only five banks have lent to Investors
from India. In addition, five banks in the sample have disbursed loans from the Indian lines of credit.
With regard to the problems experienced by these FIs when lending to Sri Lankan traders
importing from India were mainly the payment delays and defaults, lengthy procedures and the burden
of excessive documentation. Four FIs have not answered this particular question.
The recommendations by the FIs for the improvement of the ILFTA were to improve the local
Banking sector in India, to increase the awareness of the ILFTA, to reduce the long procedures,
establishment of a special desk for inquiries for exporters and importers and management of the credit
lines more efficiently.
Access to the Indian domestic market was rated as the most advantageous factor by the FIs
recording an average rating of 4.00, which indicates a high advantage. Opportunity to diversify the
export base, access to cheaper Indian imports in Sri Lanka were the other high advantage factors. All
other factors such as utilization of human capital in Sri Lanka, creation of linkages in raw material and
textiles were rated as medium advantages.
The most disadvantageous factors rated by the FIs were the insufficient knowledge about the
ILFTA, problems in customs procedures in India, lack of institutional arrangements to meet the needs
of the exporters /importers in Sri Lanka, lack of initiative from the two governments, inconsistency and
uncertainty about the Indian tariff rates, delays in approvals for setting-up Sri Lankan offices in India
and in Sri Lanka, restriction of the ports of delivery to two Ports and excessive documentation. The
least disadvantageous factors were the non-tariff barriers and the extent of assistance from the Free
Trade Secretariat with regard to practical problems
40
(e) Other Officials
In this category four non-governmental stakeholders who play an important role in the
operations of the ILFTA was selected. Due to confidentiality, the names of institutions will not be
mentioned, thus these organizations are actively involved in the FTA.
All the respondents have answered this question relating to the advantages of the ILFTA.
Majority of the factors were rated as medium advantages. Opportunity to diversify the export base,
access to the Indian domestic creation of linkages in raw materials and textiles, efficiency of the BOI
as facilitator of investment, and the extent of assistance from Free Trade Secretariat were scaled as
high advantage factors. Access to cheaper Indian cheaper Indian imports in Sri Lanka, increase in
foreign direct investment and joint ventures, spillover effects in tourism, education, health and I,T etc.
were factors rated as medium advantage. market, Utilization of human capital in Sri Lanka and
Spillover effects from tourism, education, health, IT etc. were rated as low advantages.
Among these officials a significant number of factors were rated as of high disadvantage.
Problems in the customs procedures in India, insufficient knowledge about the FTA, lack of
institutional arrangements to meet the needs of the exporters/importers in Sri Lanka, inadequate
marketing strategies and market Research, non-tariff barriers, ROO criterion, inconsistency and
uncertainty about the Indian tariff rates, restriction of the ports of delivery, high cost of production in
Sri Lanka were rated high disadvantageous. On the other hand, delays in approvals for setting-up
Indian offices in Sri Lanka, non availability of an apex body appointed in India to handle the technical
and practical matters, efficiency in the approval of contracts in Sri Lanka and documentation issues
recorded an average rating which indicated low disadvantages.
(f)Government Officials
Four government officials whose institutions/departments that were directly involved in the
implementation of the ILFTA was interviewed under this category. Though the standard questions
relevant to this segment were included in the questionnaire, the response rate was not satisfactory.
None of the respondents rated the Likert scale and some important components of the questionnaire.
The advantages of ILFTA recognized by these officials are economic benefits for Sri Lankan
importers/exporters, expanded opportunities, low priced imports, joint venture opportunities and the
availability of cheaper raw material.
41
On the other hand the problems of ILFTA according to them are the difficult terminology used,
Communication problems on the implementation of the agreement, limitations on the quota system,
ROO problems and practical problems with 4-digit level HS codes.
In the wake of these problems some important recommendations were brought forward.
Removal of restriction of entry ports, increased awareness of the ILFTA, address the problems on nontariff barriers, closer and more frequent dialogue between the two country officials, consultations with
the private sector on the relevant issues, marketing campaign for Sri Lankan products in India should
be increased, and an active FTA Secretariat in India established.
6.2 School of International Studies, Jawaharlal Nehru University
Interviews/questionnaire surveys were conducted by the School of International Studies to get
responses from Sri Lankan and Indian stakeholders including Government officials, Indian Free Trade
Secretariat (Federation of Indian Chambers of Commerce & Industry) and Companies doing business
in Sri Lanka.
(A) Interviews with Sri Lankan Stakeholders
The Indian collaborating institution conducted its interviews both in Sri Lanka and in India. In Sri
Lanka the following stakeholders were interviewed as indicated in Table below. The interviews were
organized by the Institute for Policy Studies.
Date
04/07/02
05/07/02
08/07/02
09/07/02
10/07/02
10/07/02
Persons Interviewed
Collaborating Team at the Institute for policy
Studies
Free Trade Secretariat: chamber Meeting headed
by Ms. Ayoni Waniganayake. Also Mr. C.
Jayaratne, President Ceylon Chamber of
Commerce
Mr. V.Ashok, Counsellor Economic and
Commercial, Indian High Commission
Mr. Sanath Jayatilleke, Deputy Director general,
Sri Lanka Customs
Draft Report of the study presented at IPS for
discussion and response
Mrs. Malini Tudugala, Director marketing, Sri
Lanka Export Development Board,
Mr. Dharmapala, Dy.Director, (Commercial),
CEAT-Kelani Tyres.,
Mr. Hewage, Director-General, Commerce
42
11/07/02
Mr. Hasitha de Alwis, Chairman, Sri lanka Tea
Board, Mr. Anil Hidramani, Apparel Exporters
Association, Colombo, Mr. Douglas jayasekhara,
Senior Visiting Fellow, Institute for Policy
Studies
1. Overall Business Environment
The general impression given was that the overall business environment I bilateral relations
between the two countries had improved since the coalition government led by
the United
National Party in Sri Lanka swept to power at the December 2001 parliamentary polls. It was
stated that Sri Lanka’s Prime minister Mr, Ranil Wickramesinghe and his government had been
pursuing a more friendly policy pushing it forward through regular visits to India. That policy was
showing results, buoyed by a successful peace process and a general mood of optimism in Sri
Lanka that this country was in on recovery path and there was no turning back to internal strife.
There was greater alignment of foreign and economic policies of both the countries.9
2. Constraints in ILFTA
It was stated that a number of non-tariff, para-tariff barriers acted as constraints to exporters in Sri
Lanka under ILFTA. In case of food products a number of sanitary and psyto-sanitary samples had
to be registered in Delhi under the Prevention of Food Adulteration Act under Ministry of
Agriculture. This sometimes took 3-6 months to clear. Other non-tariff barriers included licensing,
customs checks, particularly in case of food products such as biscuits, chocolates, and sausages.
This led to holding up of exports in ports.
It was stated that Sri Lankan exports were permitted only through designated ports in India. All
ports in India should be opened up to facilitate Sri Lankan exports to India.
The Commercial Counselor of Indian embassy admitted that different ports in India offered
different levels of transparency. However four nodal points in Indian ports had been designated to
offer all necessary information to exporters. Since Sri Lankan exports of quota items need to be
monitored, not all ports in India were equipped to handle this and hence only those capable of such
monitoring had to be designated. However in response to the Sri Lankan request for additional
ports, the Indian Government had agreed to open up additional ports for Sri Lankan exporters.
Several respondent interviewed stated that the imposition of quota on Sri Lankan exports be
removed for duty-free/duty preference entry to India.
43
Considerable concern was expressed regarding the imposition of discriminatory sales tax on Sri
Lankan imports by the Tamil Nadu government. It was stated that whereas local manufacturers in
Tamil Nadu were required to pay 10.5% sales tax, imported Sri Lankan products attracted 21%
sales tax.
This considerably offset some of the duty preference advantages of Sri Lankan
exporters.
It was stated by some respondent that although India had agreed to deepen the specific duty
concession on 51 tariff lines on garments from 50-75%, the ad valorem rate of 50 % remained and
only the higher of the two values were imposed. This did not benefit Sri Lankan exporters as was
intended.
Several complaints were made regarding the nature of customs valuation procedure adopted in
India on Sri Lankan imports. It was stated that the valuation was not based on cif pricing but
arbitrary. The port development charges were added to increase customs levies.
The rules of origin criteria were also stated to be one of the constraints of Sri Lankan exporters. It
was stated that Sri Lanka required more favorable criteria given that it depended quite a lot on
imported inputs for its exports. It was suggested that a reduction of local content from 35% to 15%
be accepted and the condition of transformation of at 4-digit HS level be removed.
3. Investment linkages
It was admitted that the ILFTA had induced additional Indian investment in Sri Lanka. Indian
Counselor (Economic and Commercial) stated that presently there were 78 projects Sri Lanka with
an investment of SLR 6.56 billion. A further 124 projects valued at SLR 7.98 billion were in the
pipeline while current approvals of Indian investment stood at 14.54 billion. Since March 2000, 12
new projects valued at SLR 640 million had come to Sri Lanka, of which nine were due to ILFTA.
The CEO of CEAT- Kelani Associated Holdings Ltd. was upbeat on the potential in Sri Lanka. He
stated that Sri Lanka was an ideal production base given the investor-friendly policies of Sri
Lankan and local governments, access to markets in India, good infrastructure, a tax-friendly
structure and duty-free import of raw materials for export industries.
(B) Interviews with Indian Stakeholders
In India the following stakeholders were interviewed
1. Government Officials
44
2. Senior Secretary, Federation of Indian Chambers of Commerce and Industry ( Nodal Free
Trade Secretariat in India).
3. The Representatives of following companies exporting to Sri Lanka
(i)
K.G. Denim Ltd. Coimbatore
(ii)
Ashok Leyland, Chennai
(iii)
Unipatch rubber Ltd., New delhi
(iv)
Oriental Trimex Ltd. New Delhi
(v)
B.I. Marketing and Services (Pvt) Ltd., Chennai
(vi)
Alembic Ltd., Vadodora
(vii)
Bhoruka Power Corporation Ltd. Bangalore
1. Constraints
Generally the Indian respondents did not mention many constraints facing their exports. However
some reported problem relating to realization of payments. It was suggested by one of the
respondents that once a certificate of origin was issued by either party through the designated
authority, the department of customs should honor it immediately and not raise small/minor
objections time and again.
A number of Indian exporters suggested that the list of commodities covered under the free trade
agreement be revised periodically to expand the list.
The Indian official position with respect to the imposition of quotas on India’s imports on
garments/tea was that the question of removing or increasing the quota could be considered once
this was reached. Currently a very small percentage of the assigned quota had been reached by Sri
Lankan exporters.
Regarding the imposition of higher taxes by Tamil Nadu government it was stated that this is a
problem arising out of the federal nature of Indian government. The Tamil Nadu government
charges different sales taxes for products of Tamil Nadu as compared from products coming from
outside states. In case of Sri Lanka, the sales tax rate is similar to those levied on products coming
to Tamil Nadu from other states of India.
7. Concluding Observations
45
Even though the ILFTA was signed in December 1998, it took nearly 15 months to implement
it. This shows the protracted nature of negotiations involved in the signing and implementing the
Agreement.
The study has examined the trend in Indo-Lanka trade in items conceded /offered concessions under
different categories. The data has been analyzed by the respective collaborating institutions using their
customs data. The method applied at the aggregate level of categories conceded concessions is to (i) to
see their share in overall bilateral trade, and (ii) to see their share in relation to world trade (both
imports and exports). The data reveals fairly close similarity (complimentarity) in the aggregate and
category-wise trends. Analysis of data from two independent sources adds credibility to the results.
At the micro level, product-wise/category-wise analysis of trends in both imports and exports of top
fifty products (as in 2001-02) receiving / offered concessions has been analyzed. The study reveals a
large number of common products appearing the import list of India (export list of Sri Lanka) and
export list of India (import list of Sri Lanka). Products thus identified, has been put under Annex 30 of
this paper, category-wise.
The study attempts to make an impact assessment of products conceded concessions. One direct way
of such an assessment has been to identify all products not imported (exported) at all prior to
liberalization, but being so imported (exported) subsequently (ie. ‘new products”). A number of such
“new products” in Sri Lanka’s export basket have been identified suggesting diversification of Sri
Lankan exports to India.
Given the limited number of annual observations post-liberalization, the Indian data was obtained on a
monthly basis two years prior to, and two years subsequent to liberalization. The differences in the
means of imports to India under all categories were found to be statistically significant (except for
garments). This is particularly marked in case of products offered concessions under zero duty and
those under the phased category. However the trend analysis using time and dummy as policy variables
does not give significant results except for the time variable with respect to products contained under
residual and zero duty categories. Considerable fluctuations in monthly data prevent statistically
significant results. Perhaps longer time period is required to arrive at statistically significant results.
One significant result of our study is that the increase in imports has, on the whole, modest trade
creation in case of overall Indian imports from Sri Lanka, but considerable trade creation in case of Sri
Lankan imports from India. Thus trade liberalization under ILFTA has, contrary to normal
expectations, led to overall trade creation.
46
The study has included questionnaire survey for different stakeholders in both the countries. The
responses suggest that while a number of constraints remain in operation under the Agreement, by and
large, the Agreement has proved beneficial to traders in both the countries. Some of the constraints
referred to, are being addressed under ongoing renegotiations. It is interesting to note that the
Agreement has induced additional Indian investment in Sri Lanka, thereby strengthening investmenttrade linkage which is essential to sustain more balanced incremental bilateral trade. The nature of
concessions exchanged have been such as to allow the smaller trading partner to benefit more in terms
of incremental trade by accessing the large Indian market.
Can the ILFTA be classified as Free Trade Agreement (FTA)? A FTA postulates a time frame
by which nearly all mutual trade (barring a few sensitive exceptions on security considerations) is
liberalized. In case of ILFTA, the presence of a “negative list” for both the countries points to the
protective nature of the Agreement, inasmuch as nearly one-tenth of India’s imports and more than
one-third of India’s exports are preempted from trade liberalization. Unless a time frame is set for
removal of items from the negative list, ILFTA as a “Free Trade Agreement” as the term is generally
understood, would remain a mirage.
47
Annex A
Table 1: Difference in Means of Monthly Imports Under Different Categories,
Pre and Post-Liberalisation
Category
Zero Duty
Residual
Tea
Textiles
MEAN
Pre-Liberalisation*
14980736
106819397
4834123
4266055
Post-Liberalisation*
45898590
143116649
8187243
5210244
STANDARD DEVIATION
Pre-Liberalisation
4704312
42034908
6406208
3982200
Post-Liberalisation
73983663
95149934
16717432
3136275
F Ratio
0.00
0.20
0.15
1.61
T Ratio
2.40b
1.71a
9.93b
35.08b
Note : * Denotes Value in IR.
a: significant at 10% level of significance
b: significant at 1% level of significance
Table 2: Regression* Results: Monthly Imports by Categories
Categories/Variables Coefficient
t_Value Significance Std. Error
ZERO DUTY
Constant
4.61
23.34
0.00
0.2
Dummy (policy)
0.09
0.25
0.80
0.34
Time
0.03
2.38
0.02
0.01
RESIDUALS
Constant
6.80
60.69
0.00
0.11
Dummy (policy)
-0.12
-0.60
0.10
0.19
Time
0.01
1.66
0.55
0.00
TEA
Constant
3.02
8.77
0.00
0.34
Dummy (policy)
-0.39
-0.66
0.51
0.60
Time
0.03
1.54
0.13
0.02
TEXTILES
Constant
3.87
20.60
0.00
0.19
Dummy (policy)
0.53
1.62
0.15
0.32
Time
-0.01
-1.46
0.11
0.01
GARMENTS
Constant
1.75
3.43
0.00
0.51
Dummy (policy)
-0.69
-0.70
0.48
0.99
Time
-0.01
-0.32
0.74
0.04
Note: * denotes semi-logarithmic relationship.
48
Garments
844768
382723
1445184
588323
8.03
113.96b
R Square
^R square
0.39
0.36
0.11
0.07
0.09
0.04
0.05
0.01
0.11
0.07
1
Agreed Minutes of the Senior Officials Meeting under Indo-Sri Lanka Free Trade Agreement, Colombo, 4-5 July 2002.
49
2
Sri Lanka has provided tariff preference of 20% by the end of second year.
Weerakoon Dushni, Economic and Political Weekly, Bombay, February 24, 2001
4
Symbolically, (M99-00-M01-02)* UCrow-UCp) where the first term shows the increase in quantity imported from 19992000 to 2001-02 and UCrow and UCp are unit cost of imports from rest of the world and from the partner country
respectively.
5
Before and after comparisons of imports may be affected by expectations if exporters anticipate tariff cuts in the
concession offering country. In such a case they may hold back their exports such prior to trade liberalization which could
magnify the pre and post liberalization exports. This is unlikely to have been a major factor in case of ILFTA since the
traders were not very much aware of the Agreement, and particularly its timing as has been reflected in the questionnaire
survey.
6
The main sources of data are Sri Lanka Customs and Department of Commerce (DOC) Rules of Origin Certificates. In
compiling the data, especially with regard to the ROO Certificates there were data limitations and some of the data from the
two sources did not tally. ROO certificate is the only direct source that record exports under the ILFTA, but, these
certificates once issued does not necessarily mean the particular consignment has been exported. Once the certificate is
issued there is no record whether the particular consignment has been actually exported. This study has identified these
practical data problems and limitations and has attempted to clean the data at the initial stage of utilization to eliminate
possible disparities.
3
7
Questionnaires were designed according to different stakeholder group.
8
A Likert Scale usually involves assigning between four and ten categories to a numeric scale for indicating one
appropriate response. In our case a Likert scale ranging in value from 1-5 has been used with rating improving from very
low (1) to low (2), medium (3), high (4), and very high (5) has been used. Rank 6 has been used to mark the response
“don’t know / “unspecified.” Weighted average for each factor was worked out by using ranks 1-5 only. Values with
decimal point of 0.5 and above were classified in the next higher category.
9
This was particularly expressed by Mr. C. Jayaratne
50