The governments of India and Sri Lanka will be signing the India Sri Lanka Comprehensive Economic Partnership Agreement (ILCEPA) this month on the sidelines of the SAARC Summit.
The Institute of Policy Studies (IPS), India Sri Lanka Joint Business Council, and the Indo-Lanka Chamber of Commerce and Industry organised a seminar for the private sector to enlighten them on the progress made by the joint technical committees who had met on 13 occasions for extensive deliberations.
Nothing to fear?
"India has always taken into account the asymmetry between the two countries when the level of commitment for such binding is done. I think this would allay any fears in Sri Lanka of a big country domination of the small one over trade and investment flows," Executive Director, IPS, Dr Saman Kelegama said.
History
When both countries had closed economies in the 1960s and 1970s, trade between the two countries had virtually stagnated at a low level,
"Although many economic cooperation programmes existed at that time to stimulate trade and investment, they were of limited use," he said.
However trade and investment flows between the two countries intensified with the implementation of open economic policies in India in 1991.
"By the mid-1990s, India became the largest source of imports to Sri Lanka and the growing trade relations needed to be consolidated by some measures. In this context, the signing of the Indo-Lanka Bilateral Free Trade Agreement (ILBFTA) in 1998 was a landmark event and it was the first formal bilateral FTA of Sri Lanka," Dr Kelegama said.
"When Sri Lanka decided on the bilateral FTA with India, Sri Lanka did not consider India as a threat as some neighbouring countries do, but India was considered as an opportunity."
According to Dr Kelegama the bilateral FTA not only triggered more trade between the two countries but also stimulated services and investment flows between them.
"To facilitate these new flows more barriers had to come down and new regulatory frameworks had to be put in place to govern pitfalls. Thus, a Comprehensive Economic Partnership Agreement (CEPA) between the two countries was discussed in 2002.
In 2003, a Joint Study Group (JSG) was appointed to do an in-depty study on IL-CEPA. The study, after several visits by both sides to each other’s countries was completed in October 2003 and handed over to the respective Prime Ministers of the two countries.
"The plan envisaged was to get the CEPA moving by April 2004. However, both countries in the first quarter of 2004 were in an election mode and had little time to pay attention to the IL-CEPA. Moreover, both countries witnessed a change of government in early 2004 - in Sri Lanka in April 2004 and in India in May 2004. The new governments in both countries needed time to have a fresh lock at what was done and eventually it was in February 2005 that Technical Level Negotiations (TLN) started," Dr Kelegama said.
"After 13 rounds of discussion - the last one which took place during the last 2 days, finally both countries have come to a position of finalization of the IL-CEPA framework. Now the agreement remains to be signed by the two Heads of States."
On the Sri Lankan side, there had been general support for the ILBFTA. The private sector, except a small minority had been in support of deeper integration with India.
"They have always argued the case for a IL-CEPA with the necessary safeguards."
"IL-CEPA means deepening the existing bilateral FTA between the countries and broadening it by the inclusion of liberalization of services and investment. The deepening of the bilateral FTA will be achieved by gradually reducing the negative list, now that both countries have duty free access to each other’s markets."
"Broadening will take place by binding the inflow of services and investments to beyond the current levels," Dr Kelegama said.
ILCEPA important - Chambers
President of the Federation of Chambers of Commerce and Industry, Nawaz Rajabdeen, said that ILCEPA would be a step forward in enhancing economic partnership between the two countries.
"ILCEPA will give us a new opportunity to iron out the problems in the FTA and will no doubt attract more FDIs India, already the fourth largest investor with US $ 5 million. ILCEPA would also generate more rural employment and industries in the provinces," he said.
Chairman of the Ceylon Chamber of Commerce, Mahen Dayananda, said that despite concerns, the FTA between the two countries had increased trade significantly.
Exports to India which amounted to Rs. 4 billion in 2000 increased to Rs. 55 billion in 2007. Imports from India in 2000 amounted to Rs. 45 billion. It was Rs. 308 billion in 2007.
"This convinced many in the private sector that deeper integration could bring Sri Lanka more benefits. With a population of over a billion people we are aware of the extent of the markets that need to be serviced," he said.
The Ceylon Chamber of Commerce had been monitoring the ILCEPA negotiations and had been one of the points through which the private sector was consulted for their concerns, recommendations and views.
"The reaction from the services sector had been mixed, but the majority is in agreement with ILCEPA," Dayananda said.
Trade in Services
The inclusion of the services sector into the India-Sri Lanka Comprehensive Economic Partnership Agreement (ILCEPA) stirred a hornet’s nest with many professional services worrying that it would open up the flood gates.
However, the Institute of Policy Studies (IPS) had been monitoring the 13 rounds of technical deliberations of both countries said that India had not indicated that it expected a reciprocal agreement.
India had been sensitive to Sri Lanka’s economic size and the lack of regulations for most professional bodies.
A Research Officer of IPS, Deshal De Mel, presented the offer lists of India and Sri Lanka to liberalise its services sectors at a seminar on ILCEPA: Opportunities and Challenges last week.
He said that commitments could be altered after three years subject to compensation for loss of investments of investors and suppliers.
India offered to liberalise more than 40 service sectors and sub-sectors at varying degrees specified and agreed upon by the technical committee.
On the other hand, Sri Lanka had offered up only 9 of its service sectors and sub-sectors. Here again, at varying degrees specified and agreed upon by the two countries.
De Mel’s presentation showed that each country had not fully liberalised their services, especially Sri Lanka, and where they did, certain restrictive clauses seem to be put in place.
The following table is drawn from De Mel’s presentation and only highlights the commitments made by the two countries with regard to labour mobility in the service sectors they would open up for each other.
The data is from the 13th and final technical deliberations concluded last Thursday.
De Mel said that the following commitments would probably be the final agreement in the unlikely event that last minute changes would be made.
India’s Commitments
Architecture, Medical and Dental, Veterinary, Research and Development in Natural Science, and Social Science, Real Estate Services, Rental and Leasing Services, Management Consultancy, Technical Testing and Analysis, Services related to Energy Distribution, Maintenance and Repair of Equipment, Building Cleaning Services, Packaging Services, Convention services, Telecommunication, Construction, Wholesale Trade, Environmental Services, Higher Education and Tourism.
The above services are open to Sri Lankans on a business visit employed by a Sri Lankan company to set up a commercial presence in India. While no remuneration can be earned their stay is limited to 180 days.
The above services sectors are open to Sri Lankan employees of Sri Lankan Companies transferred to companies in India owned or controlled by Sri Lanka for a maximum of five years.
While Engineering and Computer Related Services are open to the above two categories, India is committed to allow employees of Sri Lankan companies or independent professionals in these services to work with Indian clients on contractual basis for a maximum of a year.
Sri Lanka’s Commitments
In Computer Related Services Sri Lanka will allow Indians who are expert trainers and technical staff not more than 10 percent of the total staff for every US$ 100,000.
Naval Architects, skilled welders and fitters, project/ship managers, repair engineers, automation engineers and technicians are the other professional who will be allowed into Sri Lanka under ILCEPA.
While the two countries have opened the above sectors for labour mobility of the service sectors opened up by India, Sri Lanka can establish companies in those service sectors in India except in the field of Rental and Leasing services.
Accounting and Research and Development in Agriculture are open to Sri Lanka but only to establish companies where as mobility of labour is restricted.
Sri Lanka has committed to opening up the following service sectors for India to establish companies in Convention services, Healthcare (outside the Western Province), Tourism and Travel Agencies, Audiovisual services (50 percent Indian ownership in 25 cinema establishments) with restrictions in labour mobility.
Dr H. N. Thenuwara, Assistant Governor Central Bank said that the approach taken to liberalise trade in services was not very useful.
"The commitments are reversible so they cannot be built on. You could not get anything more than this," he said referring to the apprehensions from the Sri Lankan side which had compelled the government to make the limited commitments.
Dr Thenuwara who had been proxy to the consultative process said that even if Sri Lanka chose to adopt a protectionist stance, technology would still make Sri Lanka’s service sector open and unless technological developments are fairly large the protectionism would fail.
The success of ILCEPA would depend on the entrepreneur and professional and Sri Lanka will have to improve its visibility in India because without demand no trade can take place, he reminded.
Trade in Goods
After the last round of technical deliberations between the two countries, India had agreed to remove 114 items off its negative list while Sri Lanka had agreed to remove 36 items off the its negative list in a stake –holder driven process, according to the Director General of the Department of Commerce, Saman Udagedara.
Udagedara addressed the delegates at the ILCEPA: Opportunities and Challenges although he was not prepared to make a presentation as he was involved in the technical deliberation which concluded on the day prior to the seminar.
The Indians had earlier relaxed the TRQ on ready made garments from Sri Lanka up to 8 million pieces of which 3 million is allowed in to India duty free with no entry restrictions as long as the fabric was of Indian make.
"During the final round of deliberations India said they would increase the duty free component to 6 million while the balance will receive a 75 percent margin of preference," Udagedara said.
According to Udagedera, India has also decided to relax the Rules of Origin on several Sri Lankan exports in a bid to assist the country develop its supply side capacities.
Over 436 products have been classified into this new category, an increase from 5 percent to 70 to 75 percent of total exports to India.
"Although ILCEPA will be signed by the two governments this month, the technical committee agreed that there will be a continuous review of the negative lists after each year," Udagedara said.
He stressed that it would be necessary for the two countries to bring about a convergence in their regulatory frameworks.
Different systems, especially in customs and clearance could pose problems for both countries and said that ILCEPA will have to develop a legal framework for customs integration and cooperation.
"A new article must be developed on areas of protection, dispute settlement and antidumping, which will also build cooperation at national entry points and develop technical cooperation between the two countries," Udagedara said.
He also stressed that MoUs and mutual recognition agreements would go along way to facilitate the smooth functioning of ILCEPA.
This is a key issue especially in the services sector, where professional bodies of the two countries will have to recognise the standards, qualifications and regulations governing each professional in their respective countries.
He said that a MoU was in the process of being developed whereby Sri Lanka could benefit from exchange training programmes in traditional methods of medicine in which India has a well established model.
Subashini Abeysinghe, Economist, Ceylon Chamber of Commerce, said that Sri Lankans seemed to be content with hiding behind protectionist barriers to protect their hold on a small domestic market and failed to see India as an opportunity with its economy in expansion mode where access to larger markets could benefit Sri Lankan businesses.
"At the very start of the consultative process private sector took a defensive approach to ILCEPA and not an offensive approach by demanding for more protection," she said.
"Even now many still have apprehensions but they have not really looked at the facts and figures."
She said that the current FTA had 4,000 products for which India granted concessions to Sri Lanka but only a fraction of products amounting in to the hundreds were exported.
"New industries are not nurtured, especially in the agricultural sector, to make use of the export concessions and we continue to struggle with poor infrastructure, high energy costs and a shortage of labour which undermines our competitiveness."
Director of Marketing, Sri Lanka Export Development Board, Ranjini Tudugala, said that that in the existing FTA, India had only utilised 40 percent of the concessions Sri Lanka had granted to its exports while Sri Lanka had utilised 80 percent of the concessions granted to it by India.
Trade in Investments
Investments in Sri Lanka’s commitments to ILCEPA will see Indian companies receiving the same status as a national company in the pre-establishment period during the process of making an investment.
However, Sri Lanka can decide on a case by case basis whether or not investments from India to particular sector will be allowed, Nihal Samarappuli, Executive Director Research, BOI, said.
The scope of application will include a broad range of investments including movable and immovable property, shares, stocks and debentures, contracts for turnkey, construction and International Property Rights.
All stages of the investments, pre-establishment and post-establishment, will be covered under ILCEPA.
Taxation, granting incentives and grants and government procurement have been excluded so as to allow the policy space the government would need.
While Sri Lanka makes a commitment that no foreign investment would be acquired unfairly, a safety clause is to be added that the government could acquire such investments for a public purpose with an obligation to compensate the investors.
Samarappuli said that an Investor-to-State Dispute Settlement Mechanism is in place.
Under this mechanism Indian investors would be able to seek recourse at a neutral forum and is open to international tribunals. However, investors in the pre-establishment stage will not be able to access international tribunals.
While in the pre-establishment stage Indian are given national treatment in a bid to encourage investments, the option of seeking recourse in international tribunals is not possible as the investments would not have reached Sri Lanka as yet.
Senior State Council Janaka De Silva warned that ILCEPA should ensure that companies who received BOI status bring in the investments and not raise capital through banks in Sri Lanka.
"Investment comes in with the money. There is a concern that investors sign agreements but no money comes into the country," he said.
De Silva said however, that Sri Lanka’s commitments to liberalising trade in investments showed that it was balanced by being pro-liberalisation and keeping space for government policies.
Chief Executive Officer CEAT Sri Lanka said that Sri Lankan investors should cease the opportunities to enter India’s huge markets and encouraged Sri Lankan entrepreneurs to study the Indian market, the customer and select the right sector before venturing in.
Deshal De Mel said that ILCEPA is broadly agreed upon by the two countries and that a framework for broader economic cooperation could develop this further which could then lead to a better integration in trade in goods, services and investments.
"The agreement is drafted but does not spell out specific projects but attempts to create an overarching framework for economic cooperation to take place in a more effective and cohesive manner than what the FTA had been able to do," he said.
He said that the short term benefits would weigh in Sri Lannka’s favour but improved supply capacity and economic dynamism brought about by an economic
cooperation programme will bring greater benefits.
He suggested that the joint technical committee consider developing supply side capacities to boost trade especially in the education, energy and tourism sectors.
India could establish an institute of information technology here while Universities of the two countries engage in curriculum exchanges, student and faculty transfers.
Energy grid interconnections and investing in alternative energy, such as dendro power, could benefit the two countries.
In tourism, De Mel said that there is an opportunity to explore and promote collaborative tourism ventures.
Easing immigration requirements could lead to packaged tours between Sri Lankan and Indian tourism hotspots and promote Buddhist tourism between the two countries as well as from other countries.
Exchanging tour guides so that frequent visitors from each country could have a guide from their own country could also boost the industries of both countries.
The ILCEPA is just the starting point for looking at economic cooperation in a holistic manner but it is not clear about the bodies that will implement this, De Mel noted.
"The first step would be to consolidate the steps taken by the FTA and not lose sight that of the importance of an economic partnership agreement as a tool for generating dynamism, to stimulate the other branches of the agreement. This would be the most fundamental and important part of ILCEPA," he said.
Saj Mendis, Economic Director, Ministry of Foreign Affairs, said that ILCEPA would be a catalyst for South Asian integration and said that similar bilateral agreements with the other member countries must be explored.
He said that while Sri Lanka should work hard to increase the inflow of FDIs, the corporate sector should explore the possibilities of investing out of the country.
Rohantha Athukorale, Economic Director, Peace Secretariat, said that it would be necessary to have an inter-regional target and a road map in place to achieve the target.
He said that trade in the ASEAN block amounted to 35 percent of GDP. In the EU it amounted to 55 percent while in the NAFTA block it amounted to 60 percent. But here in the SAARC bloc it only amounted to 5.3 percent.
"Policy makers can make it happen but it will the private sector that will drive ILCEPA forward," he said.
"There was a certain amount of distrust and discomfort in the FTA and Sri Lanka’s utilisation of the quotas granted by India was below 10 percent."
Athukorale suggested that if integration in the services sector was to work, people , especially the executives and top management where for example, Indian management attitudes had strained relationships with local staff in the past, need to undergo training so as to sensitise them to the other country’s culture as personalisation is an important aspect of the services sector.
He said such a policy would build regional ties at a social level and mitigate political opposition to bilateral and regional economic integration.
Lanka should phase out opening of services sector
The Commerce Secretary of India told Sri Lanka that it should open its services sector in a phased-out manner with proper regulations in place.
Commerce Secretary Gopal K Pillai made this observation at a seminar held yesterday on India-Sri Lanka Comprehensive Partnership Agreement (ILCEPA): Opportunities and Challenges.
"Sri Lanka has to study the potentials, opportunities and challenges ILCEPA would bring and need to study what changes to its legislature would be required to be amended in order to benefit from ILCEPA," he said.
"I have struggled for many years in India, going through line by line and negotiating many Acts of several ministries and local governments. Sri Lanka must take this challenge in a large way," he urged.
"Sri Lanka has to look at ILCEPA from the point of view that India is a huge market (With over a billion people) to be exploited," Pillai said.
Minister of Export Development and External Trade Prof G. L. Peiris said that the regulatory framework was not adequate as far as the services sector was concerned.
"It’s a timely opportunity that legislative norms are put into place and this is an urgent priority of the government," he said.
Prof Peiris said that proper policy initiatives will also be put into effect so that the rural economy enjoyed the fruits of ILCEPA.
He said that the state should take an active rule and not assume that dividends would treacle down across to rural, gender and livelihoods in an equitable manner.
"The government will ensure that rural communities become full participants and that the benefits of liberalising trade will not be an elitist phenomenon."
