Demand from Sri Lanka for highly taxed Indian imports is growing, with just six per cent of total imports from India in 2015 covered by the Free Trade Agreement, down from 30% in 2004, discrediting the claim that the FTA helps Indian goods swamp the local market. Here is why detractors claim the FTA helped India swamp the market here: Sri Lanka imported $3.6 billion more worth of goods from India than it exported in 2015, growing six-fold when the FTA came into effect in 2000. This growth in the trade deficit in favour of India is stoking fears that the same could happen if the FTA is expanded to include people and investments with the proposed Economic and Technology Cooperative Agreement (ETCA).
But here is why looking at the trade deficit alone could be misleading.
First, FTA or no FTA, Sri Lankan demand for Indian goods is growing. Only 6% of Indian imports worth $4.3 billion into Sri Lanka in 2015 fell inside the FTA, according to economic policy think tank Institute of Policy Studies. This means people are demanding more Indian goods outside the FTA, amounting to 94% of total imports. When the FTA came into effect in 2000, 9% of Indian goods were covered by the FTA, peaking at 30% in 2004, according to the Department of Commerce.
Second, Sri Lanka clearly benefits from the FTA, although quota restrictions, diverse rules and stringent quality controls across India’s fragmented states and bureaucratic red tape make exporting to India a nightmare: Sri Lankan exports covered by the FTA amounted to 16% in 2000, growing gradually to 68% of total exports to India (nearing $700 million) by 2015. Also, Sri Lankan exports are growing nearly twice as fast as imports from India. Exports grew 10-fold between 2000 and 2015, while Indian imports grew six-fold.
Third, a majority of Indian imports outside the FTA are for goods not manufactured here at scale or taxed to protect the domestic industry. Vehicles, pharmaceuticals, fuel, salt, cotton, iron and steel, vegetables and cereals, electrical goods, machinery, floor and wall tiles, and bathroom ware are taxed more, meaning food, medicine, homebuilding and transportation are expensive and beyond the reach of most people in Sri Lanka.