Monday 11 July 2011 Cinnamon Grand, Colombo, Sri Lanka

1. INDO SRI LANKA TRADE RELATIONS AND EFFECT OF ILFTA Nihal de Silva, Senior Consultant, LMRB Monday 11 July 2011 Cinnamon Grand, Colombo, Sri Lanka

2. Introduction • One of the important landmarks in the relationship between Sri Lanka and India has been the signing of the Indo-Sri Lanka Free Trade Agreement on 28th December 1998 and its implementation since 1st March 2000. • The dramatic increase in trade which followed the implementation of the FTA has in recent years experienced a downturn. The current study looks at the trend in trade between the two countries, obtaining the view of importers and exporters on the reasons for trade with India and problems faced, as well as suggestions for improvement

3. Survey Objectives • The purpose of the study was to find out to what extent the larger country acted as a locomotive for the smaller neighbouring island economy or whether the larger economy has dominated the smaller one. • More specifically, it focused on organizations engaged in trade between India and Sri Lanka in respect of selected products having high growth potential, not included in the negative list for trade, to arrive at the degree and nature of various kinds of tariff concessions to Sri Lankan traders after ILFTA, and whether the outcomes have been positive or otherwise.

4. Research Design • Desk Research • To obtain background information on the operation of the ILFTA • Quantitative Field Survey (face-to-face interviews using semi-structured questionnaire) • To obtain views of stakeholders

5. Methodology Target Group: • Consisted of organizations engaged in trade between India and Sri Lanka, in product categories not included in the negative list Development of database • The database of organizations was generated from a multitude of sources, such as directories of The Export Development Board, The National Chamber of Commerce and The Ceylon Chamber of Commerce. • Exporters 20 • Importers 40 • Clearing agents 5 • Business Associations 6 • (The Ceylon Chamber of Commerce, The National Chamber of Exporters, Institute of Policy Studies, Department of Commerce, Sri Lanka Tea Board, Textile Quality Board)

6. Orientation and Briefing • A team of experienced English interviewers were briefed by LMRB Researchers on various aspects of the survey, including its purpose as well as details of the FTA. The questionnaire provided by RIS was used as the measuring instrument for the survey. Fieldwork was conducted between the period 1st November 2010 and 28th January 2011. Face-to-face interviews • In each of the above organizations, the senior decision maker handling exports/imports, or in the case of Business Associations, a senior official, was interviewed face-to-face .

7. Creation of sample frame • The criteria for selection of respondent companies, specified in the Client Brief, was strictly followed by LMRB, who interviewed only those Sri Lankan companies which were engaged in trade with India, using the ILFTA route, on products which did not fall in the negative list of both countries. Appointments • Appointments were made with senior decision makers in the different companies. This resulted in many difficulties as follows: • Being very senior people in the industry, getting appointments to fit their busy schedule was near impossible • In many cases interviews had to be re-scheduled due to the non- availability of the respondent • Fieldwork was carried out from October 2010 – January 2011

8. Industries considered

9. Desk Research • Exploratory research was conducted using published material related to the two countries. The desk research contributed to: • Understanding the economic activity between the two countries • Finding out details about the Indo Sri Lanka Free Trade Agreement

10. FINDINGS

11. Reasons for trading with India in general • Exporters • Tariff concessions under ILFTA • Close proximity • Good market demand. • Importers • Low price • Benefits under FTA • Close proximity.

12. Reasons for trading with India under ILFTA • Duty concessions under ILFTA were by far, the reason for both exporters and importers to trade with India under ILFTA.

13. Effect of ILFTA on bilateral trade • Two-thirds of both exporters and importers claimed they had experienced additional growth after the implementation of the ILFTA. • However only 15% of exporters and 20% of importers felt it had made a high / very high contribution to their company’s additional growth

14. Effect of ILFTA on bilateral trade • However according to trade statistics, while imports continued to grow steeply up to 2008, they dipped sharply in 2009, coming back strongly the following year. In contrast, exports which had shown an increasing trend up to 2005, began to decline, only recovering somewhat in 2010.

15. Analysis of trade data from 2000 to 2010

16. Sri Lanka’s Trade with China

17. Reasons for decline in exports to India • An analysis of trade data after the implementation of ILFTA clearly showed that until 2007 the products that had had the greatest impact on exports, in many cases accounting for 50% of total exports to India, were copper and vanaspathi. • Copper exports gradually increased from US$ 37 million to an all time high of US$ 189 million in 2005, falling sharply thereafter to almost zero in 2008/2009. This followed India’s removal of MFN (Most Favoured Nation) tariff and its governments’ introduction of a new regulation which specified that metal imports should conform to prices stipulated by the London Metal Exchange (LME) • Vanaspathi exports which were almost non-existent in 2004, jumped to US$ 189 million in 2005. They dipped somewhat in 2006 but recovered to reach US$ 132 million in 2007. However, vanaspathi exports collapsed in 2008 and is now zero.

18. Reasons for decline in exports to India cont. • India maintained high tariffs on imports of crude palm oil from countries such as Malaysia, while Sri Lanka maintained relatively low tariffs on imports of these products. Thus Indian manufacturers set up vanaspathi manufacturing plants in Sri Lanka, imported crude palm oil, processed it in Sri Lanka to form vanaspathi and exported it to India free of duty under the FTA. ( Dr. SamanKelegama, India-Sri Lanka Bilateral Free Trade Agreement: Sri Lankan Perspective and Implications, 2009)

19. Problems faced by exporters when using FTA route • As much as 65% of exporters claimed they faced problems when trading with India. • .

20. Problems faced by importers when using FTA route • Significantly, 73%of importers (even higher than the 65% for exporters) claimed they faced problems when trading with India under ILFTA • .

21. Business Association’s views on problems faced by traders • Delays in checking of quality certification / rules of origin • Different Indian States have different tax rates • Indian Customs sometimes allocate wrong HS codes • Labelling issues • Quota restrictions

22. External barriers faced by traders while trading with India • 65% of exporters and 82% of importers claimed that they face external barriers in India whilst trading with that country. • In the case of exporters the main problems were admin delays related to NTBs (25%) and differences in acceptance of rules of origin certification between Indian and Sri Lankan authorities(20%), whilst for importers it was delay in clearance (45%), handling of goods at Indian ports (30%) and delay in issuing certificates of origin (27%).

23. NTBs faced by traders • A much higher proportion of importers (72%) claimed they face NTBs in Sri Lanka than exporters (41%) who said they face NTBs in India. • For importers, packaging, labeling and marking, tariff classifications, import licensing, and acceptance of Indian testing methods came out as barriers. •  In the case of exporters who faced NTBs, quota restrictions, documentation requirements and non-acceptance of SL testing methods by Indian authorities, were mentioned as barriers.

24. Prospects for future investment • 45% of exporters and 27% of importers were willing to increase their investments to expand their presence in the market. [there was no provision in the questionnaire for finding out the type & size of the planned investment]

25. Opinion about who benefited under ILFTA • The majority (65%) of exporters felt that ILFTA benefited Indian businesses, while most importers were either of the opinion that ILFTA benefitted Indian businesses (42%) or the benefits were equally split (40%) between both Indian and Sri Lankan businesses.

26. Perception about simplification of documentation • Almost a third of exporters (among whom 35% said they couldn’t say) and half of importers claimed that there had been no reduction in paperwork at Sri Lankan ports.

27. Average time taken for clearance • Time taken for import clearance at Sri Lankan ports (3-4 days) appeared to be faster than for export clearance at Indian ports (5 days)

28. Knowledge about rules and regulations • 80% of exporters and 75% of importers were aware of the rules and regulations pertaining to their business. • But around one-third of exporters and over half of importers claimed that there were sudden changes. However, 33% of exporters and 29% of importers said that these changes were made public instantly • In addition, 25% of exporters and 43% of importers complained that they were harassed due to being ignorant of these changes.

29. Knowledge about negative list • Access to the negative list was low, while so too was awareness of inquiry points. • For every ten, 2 to 3 exporters and 4 to 5 importers were aware of various inquiry points that catered to trade related matters. • Of those who were aware, 8 out of 10 exporters and 7 out of 10 importers said they found these inquiry points to be helpful and efficient.

30. Opinion on physical proximity, personnel & services

31. Harassment at Sri Lankan ports • Almost three-quarters of exporters said that there had been instances where the Sri Lankan authorities had insisted on them obtaining clearance, when none was necessary. • Interestingly, only about a quarter of importers expressed the same sentiment. • However, more importers were vocal about how penalties had been levied for minor breaches and that these were far too excessive.

32. Dependence on clearing agents • The majority of exporters (70%) and importers (85%) used clearing agents whom they say have better knowledge of procedures and links with customs officers, which enable them to save time.

33. Suggestions for improvement • When respondents were asked to give their suggestions on how the FTA process could be made more suitable for trading, 40% of exporters had no suggestions. In contrast almost every importer had some suggestion to improve the process. • Exporters suggested having an on-line documentation process and more transparency of procedures • Importers mainly wanted officials to be more efficient, and to increase their awareness of ILFTA regulations

34. To sum up…. Overall the stakeholders seem to be seeking: • Systems that are technologically advanced but simple to use • Officials who are knowledgeable, efficient, honest and courteous

35. Thank You!