This week Sri Lanka and India held their latest round of negotiations on the India-Sri Lanka Economic and Technology Cooperation Agreement (or ‘ETCA’). I thought it’s a good a time as any to recollect some ideas I shared at the Daily FT Forum last month on ‘Growing with Giants’ (referring to India and China) during the session on enhancing trade linkages with India.
We Know the Potential, We Know the Pitfalls
So, here’s what we already know.
We know that India is seeing strong economic growth and has a large consumer base, and boasts a growing consumer base. Indian consumer spending is on the rise, with big opportunities for sellers in and into that market. The Indian middle class is set to be 250 million by the end of the decade; that is over ten times Sri Lanka’s entire domestic market.
We know that trade between India and Sri Lanka has grown over the past decade and a half (albeit slower than one would expect for two bilateral FTA partners – but more on that later). According to an excellent presentation by Dr. Kelegama, which he shared with me days before his untimely demise (can be accessed here), Sri Lanka’s exports to India have grown from 505 product lines in 1999 to 2100 product lines in 2012. We also know that 70% of the exports by Sri Lanka to India are under the FTA (i.e., benefit from the FTA preferences). While imports have also grown over the past decade and a half, most of these imports are outside of the FTA – only less than 10% of Indian imports come under the FTA (see the table below, extracted from Dr. Kelegama’s presentation).
We also know that the FTA has not always worked smoothly for both sides. From the Sri Lankan perspective, there are a lot of issues that businesses face in doing business with India. This is especially true of non-tariff barriers, customs and other border facilitation issues, and state-level hindrances (including a multiplicity of taxes, which have now been flattened after the introduction of nationwide GST in July).
So, we know all this. We know what the opportunity or potential is, and we know what hasn’t worked for us and why. What we now need to move towards is practical measures to boost Sri Lanka’s entry in to India and make most of the opportunities, and breakthrough the challenges, alluded to earlier.
Fighting Hard for Fairplay
Firstly, we must aggressively tackle the non-tariff barriers and trade facilitation issues that have plagued the ISFTA and wider Indo-Lanka trade. Mutual recognition of standards and conformity equivalency needs to be a priority as well as customs and wider border facilitation. These are not things that individual businesses can do, or that Chambers can do alone – these are necessarily a government-to-government process.
Since the CEPA talks broke down many years ago there has not been a systematic mechanism to address these issues, and they have simply gone un-addressed, leading to a loss of confidence among Sri Lankan businesses. The good news is that under the forthcoming ETCA it seems to be a top priority – there are plans to set up a robust ‘trade grievances redressal mechanism’ under an ‘early harvest’ scheme. While being optimistic on such an arrangement, we must remember that progress has been slow on previous attempts to address issues – particularly following Department of Commerce submission of a large dossier on trade facilitation issues to their Indian counterpart, based on inputs from affected Sri Lankan businesses.
India has ‘Make In India’. Sri Lanka Needs ‘Break Into India’
Secondly, I believe Sri Lanka needs a strong and proactive approach to ‘break into India’; to truly take advantage of economic growth and the growing middle class consumer segment there. What the authorities must look at is how to help Sri Lankan businesses succeed in India, and aggressively do whatever it takes to push that agenda forward. Here are some ideas on where to start.
Institutions like the Export Development Board (EDB) would need a specialised and expert ‘India Market Access Team’, which can be an enhanced version of the current India desk but manned with more resources. We may even need to hire an Indian trade expert to sit at the EDB to guide Sri Lankan exporters on how to break into India – a shared resource for any exporter.
Institutions like the Department of Commerce and Ministry of Foreign Affairs would need to triple their commercial presence in India. Currently there are a total of three Commercial Counselors in our missions in India. That number should be tripled initially, and raised to thirty eventually. They would also need to be located in more cities than our missions or consular offices currently are. We may need standalone trade sections in cities important for Sri Lankan businesses.
Trade support institutions can pay a key role in providing information to break into India. Market intelligence is often a public good – everyone wants it, but no one firm is willing to pay for all of it. This is where the state can help – to provide a comprehensive and up-to-date research service, as well as a hand-holding or guidance service on breaking into India based on on-the-ground information – whether it is what product segments are growing or recommending possible agents/partners.
Sri Lankan banks too would need to boost their India expertise, and major banks would need to have dedicated India desks, to advise clients on trade finance and partnerships with Indian banks.
We need to take a lesson from the Colombian flower industry. For a long time they struggled to break into the US value chain and were only simple commodity-type exporters of cut flowers. The real value was being largely captured by US distributors and retailers, who had much better bargaining power as they were on the ground in the market (US). To counter this, the Colombian Flower Industry Association established a joint facilitation and distribution centre in Miami. They invested in this as a common facility for all Colombian flower exports into the US. This changed the game, as they were able to aggressively break in to value chains that they hadn’t before and had an on-the-ground presence for the industry to utilise. It provided a platform for hundreds of cut flower SMEs to break in to the US market.
Getting Our Own House in Order
Of course, difficulties at the Indian end aren’t the whole story. There are a bunch of pain points here in Sri Lanka that hold back competitiveness of our exporters to India. These need to be addressed soon, otherwise we are simply hamstringing our own exporters right here at home. A good reference point on this is the submission to Government by the Ceylon Chamber of Commerce on precisely these issues. Titled, ‘Tackling Constraints Closer to Home’, the document highlights 7 issues related to border procedures and 7 issues related to other regulatory and administrative barriers. Many of these relate to approvals, documentation, and customs procedures, and can easily be resolved with political will combined with administrative push.
The other aspect of Indo-Lanka trade, is that we often only think about the businesses of today, the companies in Sri Lanka that currently exist, and the products that are being produced today. But, what about for those businesses yet to be born? Those products that are yet to be produced and yet to be exported to India? Listening only to businesses that exist today and their concerns about deeper trade integration with India is doing a disservice to the firms, entrepreneurs, and products that can leverage on this and haven’t even emerged yet. This is where the trade-investment nexus comes in to focus.
FTAs now are largely about the investment linkage it generates. Put simply, investors who may locate in Sri Lanka to employ Sri Lankans, use some Sri Lankan supplies, and export to India and capturing export value here. At a survey among prospective foreign investors at the Chamber’s ‘Business and Investment Conclave’, an overwhelming majority reported that the key reason they are interested in Sri Lanka is geographic location and access to regional markets. Among them, 30% were interested in locating here for export manufacturing and 15% for export services. I’ve met investor delegations from Germany, Norway, Japan, etc., that see Sri Lanka as a great springboard to the region.
From Back-foot Defense, to Down-the-Track Offense
All of this calls for a change of mindset – a shift from feeling like a victim, in danger of something bad happening, to being aggressive and positive; from always guarding our defensive interests to proactively pushing our offensive interests. To use a cricket analogy, it calls for a shift from constantly playing on the back-foot to coming down the track, taking the ball full on, and hammering it over the boundary line!
Let me conclude by extending the cricket analogy (because its hardly possible to talk about India and Sri Lanka without bringing up cricket right?). What we need now is to be well equipped. Like a batsman thrives if he has a well-crafted, well-seasoned bat, Sri Lankan exporters to India need to become well-prepared; fostering firm-level competitiveness and addressing regulatory and administrative constraints at home are essential to this. Yet, there’ll always be unexpected bouncers or a pesky in-swing yorker – harsh deliveries that are aimed at throwing us off course. We must be well guarded – helmets, pads, the works. There must also be fair umpiring and the option to call for a third upire in the event of a doubt. All this calls for provisions on anti-dumping, a robust dispute resolution mechanism and a well-functioning grievance redressal system is critical to – protection and to ensure fairplay.
And just like cricket teams watch replays of matches to scrutinize the competition, to identify weaknesses and improve with every game, Sri Lankan exporters need solid market intelligence and continuous surveillance. We need to keep studying the competition and the playing field, study the tactics of other peer countries as well as firms that succeed in India, and strive towards improving ourselves and break into India aggressively, proactively, and with a winning attitude.