By M.R. Narayan Swamy
Why are India and Sri Lanka struggling to embrace a mutually beneficial trade agreement despite plenty of attempts? Why do exports to India account for only about 6 percent of Sri Lanka’s total exports?
Colombo and New Delhi have long sought to upgrade the original India-Sri Lanka Free Trade Agreement (ISFTA) by addressing its shortcomings and expanding its scope to include services and investment provisions.
The Comprehensive Economic Partnership Agreement (CEPA) was proposed in 2003, two years after ISFTA, the first bilateral trade agreement in South Asia, was signed.
But it was scuttled due to opposition from Sri Lankan businesses.
Later, the renamed Economic and Technological Cooperation Agreement (ETCA) of 2015 encountered similar resistance from Sinhalese nationalists and trade unions.
Their criticism was that the pact provided disproportionate benefits for India.
Negotiations for the ETCA resumed in November 2023 but were derailed again. There are renewed signs of interest under incumbent President Anura Dissanayake, but a timeline remains elusive.
So, what needs to be done to salvage the situation?
Mathisha Arangala, a Lead Economist at Verite Research, feels that two key issues need to be addressed if ETCA is to gain wider acceptance in Sri Lanka and genuinely expand Colombo’s exports.
Giving a Sri Lankan perspective in the book, India-Sri Lanka Relations: Convergence, Cooperation and Partnership (Edited by P.M. Heblikar), he says that though earlier pacts granted duty-free status to many products (including apparel and tea) from the island nation, quotas and non-tariff barriers (NTBs) imposed by India constrain the full potential of these concessions to exporters.
This, he says, has eroded trust among Sri Lankan businesses regarding the value of further trade accords with India and is a contributing factor in Sri Lanka’s current resistance to ETCA.
At the same time, Arangala notes that Sri Lanka’s current export profile does not align with India’s needs or global supply chain demands.
So, a revamped deal must create a framework to facilitate higher-value goods exports from Sri Lanka to India, more so in sectors such as electronics and vehicle manufacturing, to effectively capitalise on emerging supply chains to India.
The economist believes that the steady shift of global supply chains towards South Asia, led by India, presents Sri Lanka with a major opportunity to finally integrate into global supply chains and pursue export-led growth.
For three decades, Sri Lanka failed to tap into the East-West supply chains that have emerged in East Asia despite its own strategic location on shipping lines.
Today, an economically resurgent India presents a key opportunity for Sri Lanka to revitalise its export sector and realise its longstanding goal of joining regional supply chains.
According to him, Sri Lankan businesses can strategically position themselves to cater to India’s burgeoning consumer base and also its rapidly expanding industrial landscape.
With South India attracting major foreign investments, Sri Lanka, located next door, could benefit from spill-over effects and direct access to the expanding supply chains, says Arangala, who specializes in trade policy, foreign assistance, and geo-economics in the Indian Ocean region.
Although India is one of the top import sources for Sri Lanka, the island nation’s export focus remains oriented towards the United States and the European Union.
As of 2023, exports to India accounted for only about 6 percent of Sri Lanka’s total exports, while New Delhi’s share of Colombo’s imports rose from 9.69 percent to 22 percent since 2000.
This further expanded Sri Lanka’s trade deficit with India sixfold.
Sri Lankan exports to India received a considerable boost after the India–Sri Lanka Free Trade Agreement (ISFTA) came into force in 2001. However, that momentum later waned, and exports have largely plateaued since then.
Arangala argues that for a country like Sri Lanka, with a limited range of exportable products, the primary benefit of a free trade agreement lies in reducing barriers to its existing exports.
However, nearly half the value of three key duty-free export categories, including apparel and tea, remains subject to quotas under the ISFTA, substantially limiting Sri Lanka's effective access to the Indian market.
For instance, Sri Lanka is permitted to export only 8 million pieces of ready-made apparel to India duty-free each year. Repeated calls by Sri Lanka's apparel industry to remove this quota have yet to receive a positive response.
This, the author says, severely limits potential apparel exports to India.
“In fact, previously, apparel exports to India were further constrained until 2013 by a rule requiring the use of Indian fabrics to gain duty-free access—a restriction that took 13 years to remove since the enactment of the ISFTA.”
According to Arangala, these curbs undermine the core purpose of FTAs by constraining market access and export expansion.
“They also erode the confidence of Sri Lankan businesses in further trade agreements with India, fuelling domestic opposition to deeper economic integration.”
Accordingly, says the author, any revised trade pact must incorporate broader measures to remove quota barriers.
Doing so would grant Sri Lankan businesses a wider immediate entry into India’s vast market, ultimately strengthening public support for further liberalisation efforts with the South Asian giant.
Arangala goes on to say that even when Sri Lankan products enjoy duty-free access to India without quota restrictions, various non-tariff barriers (NTBs) still arrest the island nation’s exports.
He complains that exporters of processed food encounter various procedural barriers. In some cases, discriminatory treatment by Indian officialdom has been alleged.
Such constraints, coupled with strict and unclear labelling requirements, a lack of information, delays in border approvals, the resulting storage costs, and the high cost of multiple tests, impose significant compliance costs on exporters of these products.
These challenges, the author says, effectively transform legitimate SPS-TBT (two sets of regulations that govern non-tariff barriers) requirements into NTBs, inflating costs and causing unpredictable times that hinder the establishment of lasting commercial partnerships in India.
“As the ISFTA lacks adequate mechanism to address NTBs, and previous government initiatives have failed to mitigate these issues effectively, Sri Lankan exporters remain hesitant to pursue greater liberalization and expansion into the Indian market until these barriers are comprehensively resolved.”
