1998 by Indian Prime Minister Atal Behari Vajpayee and Sri Lankan President ChandrikaKumaratunga, it has since then, by and large, received the support of the political class in both countries even after the respective governments at that time were voted out of power. Whereas the bargaining process leading to the finalization of ‘negative lists’ of items – that is, the list of items that would be excluded from the FTA – was supposed tolast only two months, the process took much longer and the FTA became operational 14months later on March 1, 2000.During the bargaining period, fears were expressed that the Sri Lankan economy might be swamped by exports from India. In particular, Colombo appeared reluctant to give uprevenues that accrued from imports of automobiles. As far as India was concerned, therewere apprehensions that ‘cheap’ tea from Sri Lanka would ruin the fortunes of tea plantations, especially those in south India, and similar fears were raised about the fate of units manufacturing garments.Eventually, tariff rate quotas were imposed on trade in tea and garments – in other words,duty concessions were allowed on trade in garments and tea subject to quotas – and rulesof origin were specified that were broadly aimed at encouraging the two countries tosource raw materials needed for exports from each other rather than from third countries.Sri Lanka agreed to increase the ‘margin of preference’ for bulk imports of cement fromIndia and India agreed to offer more ports of entry for Sri Lankan tea and garments.India, which was mainly exporting agricultural items to Sri Lanka until the late-1980s, iscurrently a major supplier of industrial goods and services. The main exports from Indiato Sri Lanka are transport equipment, cotton yarn , fabrics, made-up garments, primaryand semi-finished iron and steel, sugar, man-made yarn, fabrics, machinery, instruments, pharmaceuticals, fine chemicals, wheat, glass and glassware, ceramics, refractories,cement and paper and wood products. India’s principal imports from Sri Lanka are non-ferrous metals (mainly copper), spices (mainly pepper), refined vegetable oil or vanaspati, electronic goods, electrical machinery, scrap metal, paper pulp and chemicals.For India, Sri Lanka is a relatively small market accounting for roughly two per cent of total Indian exports and less than one per cent of total imports. India used to be the 21
destination for Sri Lankan exports in 1998 and the 16
destination in 2000 but becamethe 4
largest destination by 2004 and the 3
largest the year after. Sri Lanka’s top twoexport destinations are the US and the UK to which countries mainly tea, garments andgems and jewellery are exported. After the implementation of the ISLFTA, Sri Lanka’simports from India have stabilized at around 15 per cent of total imports – India is thelargest source of imports for Sri Lanka followed by Singapore, Hong Kong and Iran.The most impressive outcome of the FTA agreement has been the sharp rise in the totalvolume of trade. Total bilateral trade between India and Sri Lanka had been more or lessstagnant at around US$ 500 million a year during the second half of the 1990s. Thisfigure doubled to $1 billion by 2002 and nearly doubled again to almost $2 billion by2005. Close to 90 per cent of Sri Lanka’s exports to India and roughly 45 per cent of India’s exports to Sri Lanka are covered by the FTA agreement.