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03COLOMBO772 2003-05-08 11:00:00 UNCLASSIFIED Embassy Colombo
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					  UNCLAS SECTION 01 OF 02 COLOMBO 000772 



E.O 12958:N/A

REF: (a) 01 Colombo 00872
(b) 00 Colombo 00354

1. Summary: The Indo-Lanka free trade agreement
(ILFTA) completed three years of operation in March

2003. Trade between India and Sri Lanka increased
sharply in 2002. India now offers zero tariffs on
4,150 items exported from Sri Lanka. Several mid-
sized Indian companies have set up operations in Sri
Lanka taking advantage of the agreement. Investors
from other countries are also expected to take
advantage of the ILFTA. The free trade agreement
offers Sri Lanka an opportunity to become a regional
trading hub. End Summary.

Trade liberalization


2. The Indo-Lanka free trade agreement is the first
bi-lateral free trade agreement signed by Sri Lanka.
Under the agreement, India has gradually phased out
tariffs for imports from Sri Lanka, except on 429
items under a negative list, and tea, garments, and
textiles under quotas and/or preferential duties. The
most recent liberalization was in March 2003, when
India removed tariffs on 2,799 items. Consequently,
4,150 items from Sri Lanka are duty free to India from
March 2003. In turn, Sri Lanka has offered 100% duty
concessions on about 1,100 items. The import duty on
balance items will be phased out by 2008 except on
1,180 items on Sri Lanka's negative list. Since June
2002, a joint Ministerial Committee (JMC) meeting is
held annually to discuss further liberalization. Many
implementation problems were discussed at the first
JMC meeting held last June. Sri Lanka's key tea and
garment sectors continue to ask for more leeway under
the agreement as they are currently subject to quotas
and restrictions on ports of entry. According to the
Department of Commerce here, the next meeting of the
JMC is scheduled for June 2003 and is expected to
discuss services for the first time, although no
specific goals have been set yet.

Increasing trade


3. During the past three years two-way trade of goods
between India and Sri Lanka has almost doubled
increasing to $1 billion in 2002, from about $560
million in 1999. Much of the increase is attributed
to imports from India to Sri Lanka. In 2002, imports
from India increased by 40% to $835 million. India is
Sri Lanka's number one import market, with a 14%
share; imported items include a wide variety of
industrial goods and food items, some of which receive
duty concessions under the ILFTA. Significantly, the
agreement has allowed Sri Lanka to source a
substantial amount of its imports from India, which is
a cheaper supplier than Sri Lanka's usual import
markets in South East Asia.

4. On the export side, Sri Lanka's exports to India
increased substantially to $170 million in 2002 from
$70 million in 2001, but India still accounts for less
than 4% of total Sri Lankan exports. Currently, 4,150
items from Sri Lanka are eligible for duty free entry
to India, subject to 35% value addition in Sri Lanka.
Main items exported from Sri Lanka under the ILFTA are
copper and copper wire and rods, spices, clothing
accessories, furniture and fittings, tires and tea.
Sri Lanka's two main exports, tea and garments, have
quota restrictions under the ILFTA. They receive duty
concessions ranging from 50% to 75%. Sri Lankan
exports to India are expected to grow further this
year following duty concessions offered by India in
March 2003.



5. According to the Board of Investment of Sri Lanka
(BOI), since the implementation of the ILFTA in 2000,
73 Indian companies, with a total investment
commitment of Rs 36 billion ($400 million) have sought
to invest in Sri Lanka. According to BOI, 42 of these
companies have signed agreements, with 20 projects
already in commercial operation. Other projects are
awaiting approval. Most of the Indian FDI has been by
small and medium scale industrialists and has been in
the industrial sector (metal-based projects,
industrial chemicals, rubber products, and electrical
wire and bulbs). Some of the companies have found it
more economical to serve South India from Sri Lanka
than from other parts of India. A few Sri Lankan
companies have also expanded their investments in
order to export to India. These products include
plastic furniture, aluminum wire, biscuits and roofing

6. Sri Lanka is also expecting to attract third
country investment with intentions to exploit the
Indian market via Sri Lanka. Already a few foreign
companies have built plants here to export to India.
The largest is a $20 million investment by a Malaysian
company exporting medium density fiber (MDF) board.
Meanwhile, a high-tech US company is considering a
proposal to assemble telecom parts in Sri Lanka for
export to India. This product, which carries a MFN
duty of 35% in India, can be exported duty free from
Sri Lanka. BOI promotion officers told the Embassy
that they are pursuing plans to promote Sri Lanka
through the ILFTA to select U.S. companies.

Sri Lanka as a regional hub


7. Sri Lanka's strategic location in the Indian ocean
near the shipping lanes connecting east and west, its
close proximity to Indian subcontinent and its largely
liberalized trade regime together make it an ideal
location for a regional hub in South Asia. The ILFTA
links Sri Lanka to the large Indian market with a
population of over one billion people. In addition,
Sri Lanka is negotiating a free trade agreement with
Pakistan (population 150 million) and also plans to
discuss a FTA with Bangladesh. Further, the
Government's latest economic policy document
"Regaining Sri Lanka" states that the Government will
seek to develop new markets through bilateral and
regional trading agreements with additional countries.
In addition to benefits accrued through these trade
pacts, companies setting up in Sri Lanka can import
raw materials duty free, obtain tax holidays and have
access to an educated, easily trainable workforce.

8. In order to meet hub status, Sri Lanka is in the
early stages of planning to upgrade its
infrastructure. Among the plans are major expansions
to the international airport and the Colombo port. In
addition, there are plans to build a new port in
Hambantota in the southern province. Preliminary
studies to build a land bridge between India and Sri
Lanka have been completed.



9. The ILFTA is not perfect, and far from what the US
would consider a gold-standard FTA. Still, it is an
important start in a region where, with the exception
of Sri Lanka, tariffs remain among the highest in the
world. As SAARC's efforts to stimulate regional trade
remain stalled, Sri Lanka is assembling an apparatus
of FTAs that will allow it to function as a trading
hub for South Asia. This island of 20 million people
may be South Asia's best shot at increasing intra-
regional trade flows - and the outside world's best
shot at penetrating the largely closed South Asian