Not Just Tea and Coconuts

With improved bilateral relations and some positive trends in commerce between the two countries, Sri Lanka and India together might just show the way to the brave new world of SAPTA, then SAFTA.

The highlight of Foreign Minister Inder Kumar Gujral´s visit to Sri Lanka in early February was India´s unilateral move to lower tariff barriers on 70 to 80 Sri Lankan items under the South Asian Preferential Trade Agreement (SAPTA) umbrella. Even though the results of this concession will be some time in coming, there is clearly a new chapter opening in the trade relations between the neighbours in the south of the Subcontinent.

To begin with, so far as heightened economic relations are dependent upon better political atmospherics, the Gujral Doctrine of developing non-reciprocal relationships (of which the lowering of tariff barriers was also a part) is definitely clearing the air between New Delhi and Colombo.

Indeed, bilateral relations have come a long way since the 1970s and 1980s when the ethnic tensions and clashes in Sri Lanka were at their height, and India was dragged in because of the cultural links in India of the Tamils fighting for a separate state. The relations hit rock-bottom during and after deployment of the Indian Peace Keeping Force (IPKF) and its "tragic post-script", as political commentator Nikhil Chakravorty put it, was the assassination of Rajiv Gandhi. The IPKF episode and the assassination vitiated the atmosphere such that, as The Hindu wrote, "the other tracks of varied relations had remained in deep freeze…"

But after the visit of Mr Gujral, as the same newspaper commented, "the Indo-Sn Lankan relations are set to emerge from the shadow of the recent past. By placing them on a broader framework, distancing them from the wretched ethnic issue, Mr Gujral has helped bring a measure of balance to the bilateral ties. Years of mutual suspicion and fears are now overcome… The stage has thus been set for the relations to be put back on the rails in their diversity…"

The Nearer North

Colombo has been chafing under a severe adverse trade balance, with its imports from India soaring to USD 450 million annually while exports are stagnating at USD 35 million. The trend is clear from the fact that India´s export to import ratio with Sri Lanka, 4:1 in 1989-90, was 15:1 in 1995-96.

Mr Gujral´s gesture in Colombo was but a first step towards improving economic ties between the two countries, which needs to be followed up with initiatives by both sides to build synergies rather than to compete with each other in the world market. A major aspect of Indo-Sn Lankan trade, one that tilts the trade balance against Colombo, is that India does not want the commodities on offer from Sri Lanka because it is itself a major producer and exporter of these items.

Thus, while there is a ready market in Sri Lanka for Indian vehicles and transport equipment (these constituted 22 percent of the total exports to Sri Lanka in 1994-95), machinery (7 percent), glass, cement and ceramics (7 percent), cotton yarn and fabrics (14 percent), and metal products (2 percent), Sri Lanka´s major export items of tea (the country exports 95 per cent of its production), rubber and coconut are not important for India. From Sri Lanka, India imports mainly scrap metals followed by foodstuffs.

While Sri Lanka earlier looked Westward for automobiles and machinery, and towards East Asia for supplies, with growing improvement in the quality of Indian products, Colombo has started looking to its nearer north. India can expect to gain a considerable market in Sri Lanka, particularly for its fast-expanding automobile sector, if Sri Lanka were to cut the tariff rates, which in some cases are stiff. Presently, because of easier terms for used vehicles, Sri Lanka is over-run with re-conditioned Japanese imports.

As much as India, Sri Lanka seeks a market with its neighbour. This is where the lowered preferential tariffs under SAPTA would come into use. In addition, India and Sri Lanka are both signatories of the Bangkok Agreement (which also includes Bangladesh, South Korea, Papua New Guinea and Laos), under whose framework New Delhi has extended substantial tariff concessions in respect of 66 items.

But more than these concessions, it is joint ventures with Indian companies which would perhaps be of more interest to Sri Lanka in its relations with India´s larger economy. This would help Colombo expand its production and supply base while allowing Indian entrepreneurs access to raw materials and market. In fact, Sri Lanka has already attracted a number of Indian business houses in sectors as diverse as engineering, chemicals, travel and tourism, hotels, automobiles and textiles.

There is already considerable Indian involvement in the Lankan economy, for example, the turnkey construction of a sugar factory by an Indian company (KCP Ltd) under the adb aegis; operation of public sector textile mills under management contract; contract for hold management (by the Oberoi chain); consultancy services for improvement of the railway system; and construction of oil storage tanks, also on a turnkey basis. While a number of big corporate houses such as Jay Engineering Works, Colour-Chem, Voltas International and Ashok Leyland have joint ventures, Apollo Hospitals are looking to building a giant facility in Sri Lanka, and MRF is reportedly looking at putting up a tyre unit.

Indian entrepreneurs venturing to Sri Lanka have faced the problem of payments, but things are likely to improve with Mr Gujral having offered a line of credit worth USD 15 million. An earlier tranche of a similar amount, as part of a USD 30 million aid package sanctioned last January, was used up largely to buy passenger buses.

Competition over Tea

While more and more Indian enterprises are going in to take advantage of the liberalising Sri Lankan economy, the same cannot be said for Sri Lankan businessmen wanting to set up units in India. With the problem of militancy persisting, Indian authorities have been suspicious about the bona fides of some of the applicants and preferred to err on the side of safety. However, according to a trade source, this can be "sorted out" by involving the chambers of commerce and government agencies in the screening process.

The best opportunity for joint Indo-Lankan effort is perhaps offered in the tea sector where both countries are competitors. Though India is the larger producer of tea, Sri Lanka has now replaced India as the number one exporter, capturing 22 per cent of the world market. Tea was a complete government monopoly in Sri Lanka till 1992, when the government opened up the industry enough to allow management by the private sector. Under private management, which included Indian corporates, Sri Lanka´s tea production improved from 179 million kg in 1983 to 231 million kg in 1993, according to Colombo´s Finance Ministry data. The improvement was also in quality, and Lanka tea was soon competing with South Indian teas in the global market. Its advantage is that Sri Lanka produces up to 12 varieties of flavoured teas, including a mango flavour.

Partly affected by Sri Lanka´s robust showing, India´s tea exports dropped to 150 million kg in 1993-94 from 215 million kg in 1991-92. Colombo´s coup actually came the year when Russia, which had till then been India´s major buyer, began purchasing its teas from Sri Lanka, lured by the liberal line of credit offered (often up to one year) and the Bank of Ceylon writing off several bad debts. In fact, such is the demand for Sri Lankan tea that Indian varieties are now imported and re-exported under its brand equity. At times, the competition between the two industries has been ugly, as for instance when the Indian industry organised a seminar on South Indian versus Sri Lankan teas.

This kind of scrabbling is best avoided, as the buyers then make much capital of it. Much better, for the two countries to come together and take advantage of their pre-eminent position as tea producers. Tea consumption is growing steadily in India, and it is said that by 2005, the country may be consuming all of its production. It would therefore make sense for India to import some quantities from Sri Lanka for domestic consumption, releasing its superior varieties for export. Another idea that has been floated is to set up joint projects to blend Indian and Sri Lankan teas in a 1:4 ratio for export. Indian tea producers are interested in such collaboration, and companies such as Tata Tea have entered Sri Lanka by buying equity stakes in plantations.

According to a paper prepared by the Federation of Indian Chambers of Commerce and Industry (FICC1), the two countries can also benefit by co-operating in the areas of natural rubber, cloves, chemicals, transport and automobiles, railways and tourism.

There is also said to be considerable opportunity in shipping. Even now, most foreign vessels trans-ship at the Colombo port which offers faster turnaround than nearby Indian ports, but to make better use of this facility the ferry service to India needs to be strengthened. The Tuticorin-Colombo port fern,, suspended at the height of Tamil militant activity, is to be restored and this should help particularly the small traders who were badly hit when this link was snapped.

As important as restoring the ferry service would be ensuring a rationalisation of freight rates, which get skewed because of the large one-way flows. The F1CCI paper suggests a circular route involving India, Sri Lanka and the Maldives, which would consolidate cargo movements.

South Asian Harbinger

Clearly there exist considerable synergies for the two countries to take advantage of. Hopefully, the visit of Mr Gujral and activated SAPTA will improve the trade ties. According to a study on India-Sri Lanka Economic Cooperation by the World Institute for Development Economics and Research (WIDER), "closer market integration of Sri Lanka and India through the extension of reciprocal trade preferences can be expected to lead to welfare gains from trade creation based on existing state comparative advantages."

In a "free-trade" world which is actually witnessing increasing bloc formation, South Asia must not be left behind. Already, much time has been lost in quibbling between South Asian neighbours, which has been to the detriment of the regional economy as a whole. For those who would like to see the SAARC organisation activated as an effective trading bloc, the economic promises held out by the Indo-Lankan rapprochement is something to pin hopes on. It should provide a solid leg to the visualised edifice of regional trade.