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Economic relations between India and Sri Lanka have a long history dating back to centuries. The formal economic relations in the post independent era began in 1968 with the setting up of the Indo-Lanka Joint Committee on Economic Cooperation (ILJCEC), which aimed at increasing economic cooperation in trade, industry, agriculture and tourism. This joint committee was later transformed into a Joint Commission for Economics, Trade and Technical Cooperation (JCETT) consisting of two layers: the Commission of Ministers of Foreign Affairs and a sub-committee consisting of senior officials. An additional sub-committee was added in 1992 to cover Culture, Education, and Social Activities, while a third sub-committee was added in 1993 named Sub-Committee on Science and Technology. The sub-committee on economic affairs was renamed as the sub-committee on Trade, Finance and Investment. The JCEET was a useful instrument for the officials of the two countries to meet and discuss trade and economic issues.
Economic and political relations between the two countries were dependent on the political and economic policies pursued by the two countries. For example, the economic and political relations between India and Sri Lanka were turbulent during the latter part of the 1970s and early 1980s as that was a time that Sri Lanka introduced liberal market policies but India still pursued an import-substitution policy. In addition, India maintained much closer economic and political cooperation with the Soviet Union while Sri Lanka opted for ideological bias towards the West.
â€œThe ISFTA has triggered regular meetings between trade officials of both countries; they have provided a forum to discuss various trade and institutional issues. Thus, it is clear that substantial groundwork had been done by both countries to build an institutional framework to strengthen economic cooperation. It would be beneficial to review, consolidate and expand the functioning of such existing mechanisms and streamline their activities to meet the objectives of both nations under the proposed CEPA. (Source: Prof: Upali Wickramasinghe, A Survey of progress and Lessons for the Future-,EC-SL Trade Development Project Paper)
Spurred by the implementation of ISFTA in 2000, exports from Sri Lanka to India have increased rapidly over the years. Though the ISFTA has facilitated to further strengthen the trade and economic relations between the two countries, economic asymmetries of the two countries have reflected in the overall trade. India being a resourceful country with highly developed industries and secured market posses comparative trade advantages over Sri Lanka. On the other hand, Sri Lanka with limited basket of products offers without scale advantages finds it difficult to avail the maximum advantage of the ISFTA (See Trade Statistics section)
Comprehensive Framework for Economic Cooperation
With the objective of further enhancing the current economic relations, the Governments of Sri Lanka and India, at the highest political level, have agreed to conclude a Comprehensive Economic Partnership Agreement (CEPA). The CEPA aims at promoting trade in both goods and services, facilitating greater investment flows and enhancing mutual cooperation in the sphere of overall economic relations.Â The existing Indo-Sri Lanka Free Trade Agreement (ISFTA) will become the â€œGoods Chapterâ€ of the CEPA, with further improvements.
To asses the current status of the bilateral relations and make recommendations on how to move the two economies towards greater economic integration through the conclusion of a CEPA, the then Prime Ministers of Sri Lanka and India in 2002 appointed a Joint Study Group (JSG). The (JSG), co-chaired by Mr. Rakesh Mohan of the Reserve Bank of India and Mr. Ken Balendra of Sri Lanka, concluded in 2003 that the accomplishment of the CEPA would take the two countries to a qualitatively new level of engagement by intensifying and deepening bilateral economic interaction.
The JSG recommendations include improvements to the current ISFTA, binding commitments in identified sectors in services, facilitation of investment flows and enhanced cooperation in the fields of education, culture, ocean resources exploration, health and medicine, agriculture, ferry services, development of railway etc. However, the two sides agreed at the Commerce Secretaries level meeting in August 2004 to refer to the JSG report as a useful reference document in the CEPA process, as it contains valuable recommendations, but not as the basis for Negotiations. The two sides also agreed on two fundamental principles viz, to take in to account asymmetries of the two economies in all elements of negotiations and progressive and sequencing of liberalization in the Services sector.
The binding commitments on trade in goods under CEPA would primarily relate to (a) reducing the size of the negative lists, in the current FTA, (b) more flexibility on rules of origin criteria, (c) elimination of non-tariff barriers, and (d) mutual recognition of products standards and conformity assessment.
As regards the binding commitments on trade in services, the bilateral negotiations will cover pre-identified service sectors, using the WTO General Agreement on Trade in Services (GATS) as the negotiating framework and its positive list approach. The service sectors that are being considered by Sri Lanka for liberalization at the initial stage include information and communication technology, tourism & leisure industry, financial services and transport & logistic services. It is proposed that high priority be given to the infrastructure development and the future growth areas which will facilitate making Sri Lanka a service-hub in the region of South Asia. Sri Lanka would not consider any binding commitments on liberalisation of professional services (i.e., medical, legal, architecture, accounting etc.,) until proper regulatory mechanisms are put in place in respect of such service sectors.