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Making Lanka the gateway to India

Prime Minister Ranil Wickremesinghe with his Indian counterpart Atal Behari Vajpayee

Minister Milinda Moragoda

After years of painstaking diplomacy and confidence building measures, Prime Minister Ranil Wickremesinghe finally came good last week securing for Sri Lanka a solid foundation with India to ensure economic as well as defence stability.

For Prime Minister Ranil Wickremesinghe, it was a long journey, which commenced in the early '80s when Sri Lanka's relations with India was at a low ebb. But he worked from the early '80s with Milinda Moragoda (at the time special envoy of the government) to build Indian confidence in his vision for Sri Lanka.

In Wickremesinghe's vision, Sri Lanka is to India what Hong Kong is to China. The Prime Minister's relationship with the Indian political establishment was built from the time he was industries minister in President J. R. Jayewardene's government and he developed a close rapport with the Indian Prime Minister Atal Behari Vajpayee, when the latter was India's minister of external affairs and also when he was in the opposition.

It was Wickremesinghe while industries minister who in the early 1990s started negotiations with India for a Free Trade Agreement (FTA), which was finally signed during the PA tenure in December 1998 and made operational in March 2000. The preliminary report for Wickremesinghe to work towards a FTA with India was prepared at the time by Dr. Lal Jayawardena from the WIDER organisation.

On assuming office in 2001, Wickremesinghe made it a point to make his first official visit overseas to India.

It was Wickremesinghe's vision that Sri Lanka should be the gateway to India and that we should economically integrate with the giant neighbour across the Palk Strait, especially the southern states.

Therefore, in his first visit as Prime Minister after the 2001 election, at his discussions with the Indian Prime Minister, having set out his plan for peace in Sri Lanka, he offered to India as a confidence building measure, the Trincomalee oil tank farms as promised under the Indo-Lanka agreement.

It was also in a bid to give India an abiding interest in Sri Lanka that he invited Indian Oil to make its presence felt in Sri Lanka.

Having built on the relationships established from the 1980s, the Prime Minister thus laid the groundwork for India's dominant presence in Sri Lanka as a safety net during his very first visit as Prime Minister.

During his second visit to India as Prime Minister, the idea of setting up a Joint Study Group (JSG) was discussed and agreed upon, while a defence cooperation agreement was also mooted.

Infact, the number of security personnel trained on the ground by India has increased from 700 at the time he took office to almost 2000 by March this year.

At the time Wickremesinghe took office, Sri Lanka was in an Indian list which prohibited the sale of lethal weapons to the country. India took Sri Lanka off the list in January this year. In addition, the two navies have also engaged in joint cooperation.

It is in this overall background that Prime Minister Wickremesinghe and Indian Prime Minister Atal Behari Vajpayee last week decided to enter in to a comprehensive economic Partnership Agreement (CEPA) by March 2004 and also start immediate negotiations for a defence cooperation agreement.

The defence secretaries of the two countries will now meet shortly to start work on this agreement.

We reproduce below the joint statement of the co-chairmen of the JSG that prepared and recommended the CEPA and a summary of their recommendations. 

Joint statement of the co-chairmen

1. India and Sri Lanka enjoy excellent bilateral relations, sustained by geographical proximity, historical and cultural affinities and frequent high level political interactions,

2. The India-Sri Lanka Free Trade Agreement (ISLFTA) was signed in December 1998 and became operational in March 2000. As a result, trade expanded significantly to touch USS 1 billion in 2002.

3. During the visit of the Sri Lankan Prime Minister to India in June 2002, the Prime Ministers of India and Sri Lanka discussed the profound changes in the international economic and political arena that have been generated by the process of globalisation, on the one hand, and emergence of closer regional economic associations on the other. They agreed on the need to widen the ambit of the ISLFTA to go beyond trade in goods to include services and to facilitate greater investment flow between the two countries. Accordingly, a Joint Study Group (JSG) was set up to make recommendations on how to take the two economies beyond trade towards greater integration and to impart renewed impetus and synergy to the bilateral economic interaction, through the conclusion of a Comprehensive Economic Partnership Agreement (CEPA).

4. The JSG was appointed in April 2003 and held its first meeting in May 2003. Through its deliberations over five meetings, the JSG concluded that accomplishment of the CEPA would take the two countries to a qualitatively new level of engagement by intensifying and deepening bilateral economic interaction. It would also contribute to greater receptivity to bilateral, sub-regional and regional cooperation in the region by demonstrating visibly its benefits to South Asia as a whole.

5. There was complete agreement in the JSG on the need to forge closer economic linkages to build on the advantages of geographical proximity and close political relations. The CEPA would have four components.

6. First, the existing ISLFTA would be widened to include more goods, and deepened to improve market access through trade facilitation and removal of non-tariff barriers. The JSG recommendations, when implemented, would serve to enhance trade flows through adoption of additional flexibility regarding the Rules of Origin criteria and through mutual agreement regarding procedures on issuance and acceptance of Certificates of Origin. The conclusion of Mutual Recognition Agreements (MRAs) between product certifying agencies of both countries would help greatly in mutual acceptability of goods produced in either country.

7. Second, an agreement will be entered into on trade in services. Negotiations should cover all service sectors and modes of supply under the GATS framework and the resulting agreement should cover a wide spectrum of services. In this area, importantly, the JSG recommends that the two countries explore ways to lower barriers to movement of business people and professionals and facilitate Mutual Recognition Agreements (MRAs) on professional qualifications. The JSG recommendations accord special priority to market access for provision of transport and logistics services. Among other action, this will be facilitated by liberalisation of the bilateral air services agreement to increase the number of flights and destinations available to each country's airlines, including private airlines.

8. Third, the CEPA will include measures for promotion of investment in each other's countries. The JSG recommends that administrative and regulatory constraints be removed to promote bilateral investment flows that would help to maximise mutual benefits of economic integration. Specifically, the Board of Investment of Sri Lanka should set up a special cell to encourage and facilitate Indian investment in Sri Lanka. In India, Sri Lankan investors seeking to make foreign direct investment or portfolio investment should be treated on par with other international investors. Significantly, in regard to Foreign Direct Investment (FDI), the JSG has recommended that consideration should be given to providing pre-establishment of national treatment in sectors where 100 per cent FDI is permitted on the automatic route in both countries, but with appropriate safeguards built in. The existing Bilateral Investment Promotion and Protection Agreement and the Avoidance of Double Taxation and Prevention of Fiscal Evasion Agreement should be reviewed by the two governments in order to enhance their scope and effectiveness.

9. Fourth, the CEPA will include measures for enhanced economic cooperation in areas hitherto inadequately explored such as transportation, infrastructure, education, tourism, and information and communications technology. Specific actions for example could include financial and technical cooperation from India in modernising the Sri Lanka railway system, and in establishing an educational institution in Sri Lanka on the lines of the Indian Institutes of Technology, to embody the spirit of friendship underlying the CEPA. To provide an impetus to some of its recommendations in this area, the JSG recommends the replenishment of the existing line of credit for commodities and services, as and when required, and to set up a new infrastructure line of credit of US$100 million, to begin with, for infrastructure projects. In addition, the JSG also recommends the establishment of an India Sri Lanka Economic Cooperation Fund for US$100 million, to begin with, to facilitate financial cooperation in such areas. The liberalisation of visa regimes to include more categories of visitors for long term, multi entry visas and simplification of procedures for other visas will help in the movement of people related to all areas of trade, investment and economic cooperation.

10. Both countries are committed to an agreement consistent with WTO rules. The JSG assessed that the successful conclusion of the Comprehensive Economic Partnership Agreement between India and Sri Lanka would help both countries to experience the impact and potential of the process of integration on a bilateral basis in the first place. This would be beneficial to both countries in the context of the on-going global liberalisation process that is continuing in the WTO framework. It would also give affected sectors in both countries time to adjust for the larger global changes anticipated.

11. We are of the strong view that negotiations for the India-Sri Lanka Comprehensive Economic Partnership Agreement should begin as soon as possible, with the aim to conclude negotiations within four to six months from the submission of this report to the Prime Ministers. Such timely action will enable both countries to reap the early benefits of freer trade in goods and services, expansion of investment and enhanced economic cooperation.

12. As co-chairmen of the Joint Study Group we have great pleasure in submitting this report to the Prime Ministers of India and Sri Lanka.

Rakesh Mohan
Co-Chairman
Joint Study Group
India

Ken Balendra
Co-Chairman
Joint Study Group
Sri Lanka 

Summary of Recommendations
Chapter 1
OVERVIEW

The JSG recommends that the two countries:

* Enter into a Comprehensive Economic Partnership Agreement.

* Build upon the ISLFTA by deepening and widening the coverage and binding of trade in goods.

* Notify the resultant agreement to the WTO under GATT Art. XXIV.

* Enter into broad negotiations covering all service sectors and modes of supply under the GATS framework.

* Notify the resultant agreement under GATS Art. V.

* Facilitate greater investment flows by addressing identified regulatory and operational constraints.

* Implement measures to enhance economic cooperation to complement trade and investment liberalisation.

* Complete negotiations on the CEPA within four to six months.

* Establish institutional mechanisms to monitor the progress of the CEPA so that the objectives are realised.

* Facilitate interaction between, and participation of, the private sectors of the two countries in the negotiation of the CEPA and its implementation.

Chapter 2
TRADE IN GOODS

Summary of recommendations

The JSG recommends:

* Trade liberalisation:

 Reduction in the size of the "negative list," taking into consideration the socio-economic sensitivities of both countries and the asymmetry of the two economies.

 Encouragement to the Sri Lankan tea and garment exporters to make use of existing quotas, given India's commitment to enhance them if they are nearing full utilisation.

* Rules of origin

Additional flexibility regarding the rules of origin criteria, by considering the following:

 Abolition of the requirement for HS conversion at 4 Digit level where domestic value addition (DVA) exceeds 40 per cent of the FOB of the finished products.

 Dispensing with the conversion requirement where CIF value of non domestic input is less than 7 per cent of the FOB value of the finished product.

 Encouragement to Sri Lankan and Indian exporters to source inputs from each other by considering imported inputs from ether country as domestic inputs.

 Adoption of 6 digit HS conversion for certain identified groups of tariff lines.

* Origin verification procedures

 A verification procedure be designed by the two countries that would refine the issuance of the certificates of origin in order to facilitate enhanced trade flows.

 The dispute settlement mechanism be strengthened, including greater participation of the private sector.

* Customs procedures

 Both Customs administrations adopt risk management procedures on compliance efforts on high risk goods and clear low risk goods expeditiously through the "green channels," and exchange information on best practices.

 Both countries adopt paperless trading and give priority to the implementation of paperless trading at the major ports of Mumbai, Chennai, Nhava Sheva and Colombo.

* Transparency

 Both countries make available all laws, regulations, judicial decisions, and administrative rulings relating to requirements for imported and exported goods on paper on the electronic medium and paper.

* Mutual recognition

 MOUs between the relevant agencies of the two countries should form the basis for commencing negotiations on MRAs at the earliest.

 The product standard certifying agencies of both countries should meet at the earliest to set out a roadmap defining the scope and parameters of mutual recognition of standards and conclude MRAs expeditiously.

* Non-tariff barriers

 Identify non-tariff barriers and work towards their elimination.

Chapter 3
TRADE IN SERVICES

Summary of recommendations

The JSG recommends that the two countries:

* Enter into negotiations that cover all service sectors and modes of supply under the GATS framework and conclude an agreement that will cover a wide spectrum of services.

* Bind market opening in telecommunications, computer and related services and e-commerce.

* Facilitate increased tourism trade through liberalisation of the cluster of related services and visa formalities.

* Accord special priority to market access for provision of transport and logistics services.

* Increase passenger transport by liberalising the air services agreement and commencing ferry services.

* Further Mode 3 trade and facilitate Mode 4 trade in health services through Mutual Recognition Agreements (MRAs).

* Encourage Mode 3 and other trade  infrastructure services and enable energy trade by linking utility grids.

* Establish rule based arrangements for trade in construction and related engineering services.

* Increase cooperation between financial regulators, beyond the multilateral framework to respond to CEPA driven changes.

* Explore ways to lower barriers to movement of business people and professionals and facilitate MRAs on professional qualifications.

Chapter 4
INVESTMENT

The JSG recommends that:

* Administrative and regulatory constraints be removed to promote bilateral investment flows that would help to maximise mutual benefits of economic integration.

* Board of Investment of Sri Lanka to have a special cell to encourage and facilitate Indian investment in Sri Lanka, particularly for infrastructure projects.

* Sri Lankan investors, both individuals and companies seeking to make foreign direct investments (FDI) and portfolio investment in India be treated on par with other international investors.

* In regard to FDI, consideration should be given to providing pre-establishment national treatment in sectors where 100 per cent FDI is permitted on the automatic route in both countries. Appropriate conditions would need to be framed such as restricting this facility to nationals and juridical persons of the two countries and excluding categories such as permanent residents and branches of non-incorporated companies.

* Cross listing of Indian companies on the Colombo Stock Exchange and Sri Lankan Companies on Indian Stock Exchanges be considered through the depository receipts mechanism.

* Top rated Sri Lankan financial institutions be permitted to raise resources in India.

* The investment promotion authority (BOI) in Sri Lanka and the Exim Bank in India play a more pro-active role for identifying areas of co-operation including opening of additional LOCs with banks/financial institutions in Sri Lanka.

* Reviews be carried out by the two governments to enhance the scope and effectiveness of Bilateral Investment Promotion and Protection Agreement and Avoidance of Double Taxation and Prevention of Fiscal Evasion Agreement.

* Focus be given to investment promotion, and cooperation In the area of technical manpower.

* Work out an appropriate institutional mechanism for provision of information and support services to enhance the quantity and quality of investment flows between two countries.

Chapter 5
ECONOMIC COOPERATION TO COMPLEMENT TRADE LIBERALISATION

The JSG recommends that the two countries:

* Engage in economic cooperation beyond rule-based liberalisation, in order to facilitate trade and investment, engage in joint activities with mutual benefits, and build understanding and trust.

Actions to facilitate trade and investment

* Liberalise the Bilateral Air Services Agreement to increase air transportation capacity to serve current and anticipated demand.

* Conclude an agreement on, and facilitate early operation of, ferry services.

* Build on Indian cooperation in modernising the Sri Lankan railway system.

* Liberalise visa regimes to include more categories of visitors for long-term, multi-entry and simplify procedures for other visas.

* Increase cooperation on undersea cables and encourage a regional peering point for Internet traffic.

* Implement expeditiously the existing MOU on cooperation in IT and IT enabled services.

* Encourage redundancy and backup facilities for software and business process outsourcing industries in each other's countries and ensure compatibility of e-government and authentication systems.

Coordination and joint promotions

* Engage in joint promotion of tourism and facilitate short-term visas for bona fide third country tourists.

* Make joint bids for international sporting events.

* Promote film and TV programmes with themes and locations from each other's countries and obtain regional exhibition rights to cultural products.

* Undertake joint efforts to explore mineral and biological resources.

* Study fisheries resources.

* Cooperate to minimise frictions caused by transgressing fishermen.

Cooperation and assistance

* Encourage financial and technical cooperation in establishing an educational institution in Sri Lanka on the lines of the Indian Institutes of Technology, to embody the spirit of friendship underlying the CEPA.

* Facilitate supply of affordable generic drugs.

* Improve cooperation in Ayurvedic research and development.

* Implement expeditiously the existing MOUs on agricultural research cooperation.

The JSG recommends that India

* Replenish existing lines of credit as required and create a new line of credit for US$ 100 million, to begin with, for infrastructure projects.

* Establish an India-Sri Lanka Economic Cooperation Fund, for say US$ 100 million to begin with, to facilitate economic cooperation.

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