Dr. Sarath Amunuguma, Deputy Minister of Finance and Planning and Senior Advisor to H.E. the President of Sri Lanka,
Mr. Buddhadasa Hewavitharana, Chairman, Institute of Policy Studies,
Mr. Kosala Wickremananyake, President of FCCISL,
Dr. Anura Ekanayake, President of the Ceylon Chamber of Commerce,
Dr. Saman Kelegama, Executive Director, Institute of Policy Studies, and
Prof. Rajan Sudesh Ratna, Institute of WTO Studies, IIFT,

Ladies and Gentlemen,

I am delighted to join you this morning at the opening session of this important conference, which is being held just a fortnight ahead of the State Visit to India of His Excellency President Mahinda Rajapaksa. I have no doubt that the ideas coming out of this meeting of minds will prove extremely useful in the deliberations of our leaders and pave the way for a richer and more beneficial partnership between our countries. Permit me also on behalf of the High Commission of India to record our deep appreciation for the work that Dr.Saman Kelegama, who is the main inspiration behind this conference and the IPS have put into its staging. We have benefited greatly from Dr. Kelegama’s expertise and I am confident that this joint enterprise, like others in the past, will prove to be of great value in helping us find the way forward.

Talking of the way forward, this conference is aptly titled in that it promises not only to look back on 10 years of achievements and challenges but also at the road ahead. While we can justly savour the fruits of the FTA, there is no doubt that we need to dwell also on what has not gone according to plan. I am often reminded of a particularly evocative saying that is used by military men the world over – no strategy survives first contact with reality; the point being that going forward and making progress involves adaptation. Let’s add innovation and upgradation to the mix and we’ll have a fair idea of the task before us. The FTA was a strategy that we adopted jointly a decade ago. While enormous benefits have been recorded, there have been unforeseen problems as well and both of us have worked together to address and resolve those problems to a very large extent. Going forward, it is incumbent on both our countries to hone this strategy, adapt it, upgrade it, introduce innovations, make it better, leaner and meaner if you like, but in all cases, make it more ready for the challenges of a constantly changing global economic context. When we entered into the FTA a decade ago, few would have imagined that, in ten years, the economic balance of the world would be on its way to decisively shifting towards Asia and away from the West. Yet, that is exactly what is underway today and that, ladies and gentlemen, is the world for which we are asked to prepare and whose challenges we must face.

When we signed the FTA in 1998, it was also the first agreement of this nature for both India and Sri Lanka. Since then, India has gone ahead and signed several FTAs or CEPAs; more are under negotiation or in the pipeline. Sri Lanka, too, has entered into an FTA with Pakistan and joined the SAFTA, APTA and BIMSTEC along with India. In this sense, the ISLFTA was a pioneer agreement – it showed the way forward to both countries and helped get over some of the misgivings over trade liberalization that were involved in these arrangements. Most importantly, the FTA provided the basic impetus for the SAARC countries to enter into a SAFTA process and to accomplish an agreement; that impulse has been taken further with the recent signing of the Framework Agreement on Services at the 16th Summit in Thimphu.

Bilaterally, of course, the FTA has led to the emergence of a genuinely vibrant economic relationship and made for a quantum jump in trade, investment and economic cooperation between India and Sri Lanka. Within two years of its coming into force, we saw a doubling of our trade turnover. In another three years, that is, by 2005, we doubled the trade turnover again. Between 2000 and 2008, the turnover grew five times. This trend would have continued in 2009 if the global economic crisis had not intervened. It should be a cause for satisfaction, nevertheless, that early figures for 2010 are already showing a strong revival of trade between the two countries, which only goes to validate the path we are embarked upon. The accomplishments of the FTA and the challenges that we are still left with are the subject matter of this conference and experts far more qualified than I am will no doubt examine these threadbare over the course of the next two days. For the moment, therefore, and if you will indulge me, let me just share some thoughts on what I see as going into the mix for building a stronger partnership between our two countries.

Sri Lanka and India are civilizational entities. We are linked by shared traditions of history, culture and values. However, it is not only history but also geography that jumps off the map like a living thing in the day to day lives of our compatriots. We may not be quite connected, but neither are we quite apart. Few in this room would not have seen the famous NASA picture of the Palk Straits. Think of that and you will see what I driving at. Of course, I can hardly claim originality in this view. Nearly seventy years ago, and even though he did not have access to NASA pictures then, this was a reality that was keenly grasped by Pandit Jawaharlal Nehru, India’s first Prime Minister and perennial visionary. He said at a public speech in July 1939 in Madras and I quote – “Any person who looks at the map can realize that it is not conceivable in any scheme of things for India and Ceylon to be cut away from each other.” I submit to you, ladies and gentlemen, that it is only by living up to our historical past and benefiting from our geographical present that we will be able to build a flourishing economic future for succeeding generations of Indians and Sri Lankans. History, geography and tradition enjoin upon us to build mutually beneficial relations, usher in affluence and prosperity together and lift millions out of abject poverty and deprivation by acting in concert.

If we are to face these challenges together, it would be helpful, if only for the purposes of imagination, to think in terms of a model. When we consider India and Sri Lanka, we often hear experts talk of the kinds of partnerships that exist between Australia and New Zealand or between USA and Mexico as models. Sometimes, references to these models are misunderstood and misconstrued in our countries. But, in my view, there may be aspects to these relationships that would be worth studying, emulating, adapting, perhaps even improving upon. What is important is that these remain successful exercises in building mutually beneficial relations, in building affluence and prosperity together and, in some cases, even in lifting millions out of poverty and deprivation, goals that both our countries equally share. An enterprise of this magnitude will also need robust institutions because, as Jean Monnet, the progenitor of the idea that became the European Community and today the European Union, said, “Nothing is possible without men; nothing is lasting without institutions”. Going forward, it is for us in India and Sri Lanka to decide together as to what the next big idea in our relationship is and what the institutions are that need to be put in place to realize that idea. Personally, I do not doubt for a minute that in order to meet the common challenges that they face in the coming years, India and Sri Lanka need to attach high priority to establishing an ever closer partnership between their economies.

Objective grounds exist for such a partnership to emerge. We are both open economies and societies. Sri Lanka, of course, took the lead with economic reforms in 1977; India started much later in 1991. Now, however, we seem to have the necessary conditions to be natural partners with the closest of economic relations and the strongest levels of integration within the South Asian region. We not only have an FTA that provides the basic foundation but we also share membership in other multilateral regional trading arrangements such as SAFTA, APTA and BIMSTEC that too have added to our integration impulses. Both our countries have emerged relatively unscathed from the global economic crisis. Even though growth slowed in 2009, the prospects for 2010 and beyond are brighter. Most observers feel that India will return to its high growth trajectory of 8-9% and higher from this year onwards. Sri Lanka, having seen off the end to armed conflict last year, is also projected to grow at upwards of 6% from this year onwards. Indeed, my friend, Dr. Kelegama, has stated recently that the objective situation enables Sri Lanka to actually grow at 8-9% and higher if certain economic policy adjustments are put in place. I have no doubt that Sri Lanka, freed now from the burden of internal armed conflict, can actually fulfill this promise. Let me expand on a few strands.

In order to realize the promise I spoke of, bilateral trade and investment have a starring role to play. Not much research has been done on the extent of trade between India and Sri Lanka in historical times, but I am more than certain that we were far more interdependent then than we are now even with a modern free trade arrangement. Take for example the fact that even as recently as 1938, India accounted for 42.5% of Sri Lanka’s imports while in 2008, even with an FTA in place, Indian exports to Sri Lanka were only about 20% of Sri Lanka’s global imports. Having said that, no argument can negate the fact that, on balance, the FTA has been a win-win for both India and Sri Lanka, a fact that I am sure this conference will bring to the fore. However, as I said earlier, we can hardly afford to rest on our laurels at a time of great economic flux. It is to our shared potential that we must look and, using the experiences of the FTA as a guide, make our choices for the future.

In making those choices, we can ignore only at our own peril the undeniable fact that integration within regions around the world is getting deeper and stronger. In our own region and between India and Sri Lanka as well, we have to deal with the obstacles within our respective national economies that come in the way of achieving deeper and greater integration. The process of transition to competition is never easy; this is something that many in India too know very well. But it would be a mistake to let the tyranny of a vocal minority negate the undeniable benefits that the majority enjoys in silence. In fact, Milton Friedman, in his 1997 book “A Case For Free Trade”, says that in the call for “protection of domestic industry” one voice that is hardly ever heard is the consumer's even as the producers raise a cacophony; the reason being that free trade brings “small” benefits to the vast majority of consumers while a handful of producers seeking “protection” tend to lose “big” and are therefore louder and more cohesive in their opposition. This even as the net benefit trade liberalization brings to large numbers of consumers, including the poor and the underprivileged among them, is much more than the losses of a handful of producers. Naturally, many of these issues go to the heart of the political and economic leadership in both our countries. Often, they have to grasp this nettle and that is one more reason that I am delighted that we have Dr. Amunugama with us this morning.

For India’s part, we also understand that, as the larger economy, India needs to assume asymmetrical obligations vis-à-vis Sri Lanka. A paper written by Geneva-based economist Tammy Holmes ? “What Drives Regional Trade Agreements that Work?” – written in 2005 found that the India Sri Lanka FTA was an effective Regional Trade Agreement and one of the few effective South-South Agreements. In her study, she tested 122 FTAs and found that only 46% of them (including the ISLFTA) were effectively implemented, in the sense that they positively and significantly increased the trade flows between member countries. She concluded that the ISLFTA was one of the first of its kind and demonstrated effectively that if the concerns of the smaller economy were taken into account with more favorable treatment, then the size differential in the economies of the FTA partners did not matter. Our commitment to this principle is enshrined in our FTA and we are committed to respecting it in future as well.

Given the size of the Indian market, Sri Lankan companies can benefit by realizing economies of scale, integrate into sustainable and low-cost value chains and invite greater investment from India and elsewhere. Sri Lanka would also be well placed, with its very high literacy rates, to help fill the shortages that might be experienced in India in the talent pool of educated professionals. Backward and forward linkages, and not just in the IT and BPO sector, where India has proven capabilities, but also all across the manufacturing and services sector, are eminently possible. As we move forward, we will see Sri Lankan industry emerging larger and more diversified and capable of greater export earnings as well. I have no hesitation in stating that India is willing to set up mechanisms that facilitate the increased presence of Sri Lankan goods and services in the Indian market. Indeed, that is our stated policy and we are serious about implementing it in practice. Mechanisms such as common sanitary and phyto-sanitary standards, mutual recognition agreements for certification of goods and mutual recognition of professional certifications will enhance the institutional framework needed for the achievement of our objective of closer integration.

There is no doubt that greater integration will lead to a rise in imports from India as well. To the extent that these are not a result of trade diversion, they will add to Sri Lanka’s trade deficit. Nevertheless, cheaper imports from India can help drive down both consumer prices as well as input costs in Sri Lanka and lead to other benefits. In any case, in moving forward, we should not let the trade imbalance in the short run weigh us down. I am reminded of what our current Home Minister stated in November 2007 during his visit to Sri Lanka as India’s Finance Minister to deliver the Lakshman Kadirgamar Memorial Lecture. He said that as Commerce Minister in the 1980s, he had been troubled by India’s burgeoning trade deficits. However, following India’s economic reforms beginning in 1991 and the consequent increase in foreign investments, he was happy with net inflows of capital being positive as they took care of the trade deficit and also added future capacities for exports over a longer term. This reasoning remains valid today.

Moving on from trade, investment is clearly a major focus area for us in the future. It should be our joint endeavour to facilitate greater integration that will see the emergence of Sri Lankan and Indian companies linked on a value chain in search of cost effectiveness and competitiveness. The pioneer in this, I am happy to note, is a Sri Lankan company, Brandix, which just last month opened a fully integrated textile city at Vishakhapatnam. There are other examples that offer hope and augur well for the future. The rise of Sri Lankan Airlines as the largest foreign airline in India, the emergence of Colombo Port as the leading port in South Asia feeding on the Indian transshipment business, the position of Colombo Dockyard as the ship-building and ship-repair hub for Indian shipping companies with nearly 78% of its revenue coming from India, the performance of the Heritance brand of Aitken Spence and the Amante brand of MAS Holdings – these are all facts on the ground and examples that can and need to grow in numbers.

On the Indian side, many major Indian corporate houses – TATA, CEAT, Lanka IOC, Airtel, UltraTech, to name a few – already have a presence in Sri Lanka and recent developments have re-kindled interest among Indian corporates in greater investments in the Sri Lankan economy. The proposed additional investments by Airtel and the L&T Infrastructure alone would double the investments made so far. The investment plans of Indian IT major Mphasis indicate that the BPO sector in Sri Lanka stands to gain as well. While leading Indian names in the automobile and transport sector like the TATAs and Maruti are believed to be contemplating new investments, companies like Lanka IOC and UltraTech wish to expand their operations, having gained in experience. The cumulative effect of these Indian investments would be to deliver low-cost goods and services to Sri Lankan consumers. I want to mention here the presence of Lanka IOC in the retail market for oil in Sri Lanka. The importance of their presence can be better understood if we appreciate the fact that they shared the burden of losses while ensuring security of oil supplies during a very difficult period for Sri Lanka in 2008 and early 2009. Similarly, India’s largest investment in Sri Lanka to date, by Bharati Airtel in mobile telephony, has helped to drastically bring down the mobile call rates in Sri Lanka and in particular between Sri Lanka and India. Similar impact can be made in other areas as well, including IT, education, health, etc., as also in infrastructure development by the adoption of successful strategies such as public-private partnership.

A third strand going forward would be tourism, which is a major foreign exchange earner for both our countries. India already accounts for the largest number of tourist arrivals into Sri Lanka. Similarly, Sri Lankan tourists traveling to India account for about 4% of the arrivals in India, the largest from any South Asian country. We can easily add to this volume if we put in place the right infrastructure in so far as travel connectivity is concerned, for example. Working together in jointly promoting and marketing tourism globally can also deliver impressive results for both countries. The upcoming IIFA awards in early June should go a long way in creating a Sri Lanka brand in India and elsewhere. The total value of publicity Sri Lanka would get out of this event, I am told, is in the vicinity of $150 million. That is the kind of staging that can be done if we were to come together even in other areas.

Before I conclude, let me briefly touch upon some perceptions related to the FTA in Sri Lanka, which I am sure the experts gathered here will examine in some detail. Often, it is stated that the FTA did not address non-tariff barriers (NTBs) which restrict market access to India. Of course it did not. It was the first FTA for both countries. Both of us learnt what worked and what didn’t, especially what it was that needed fixing, if need be, by concluding another agreement. We realized for example that we needed to get closer cooperation going between the Customs Departments of the two countries so that transparency and predictability and even facilitation could be ensured. We realized that we needed to remove discretion with the authorities by having water tight arrangements on testing and certification as well as sanitary and phyto-sanitary standards. It is often not recognized that 90% of the NTBs exist because of lack of harmonization and agreements between countries on these issues. This can also help improvement in the regulatory standards in the two countries, which is often an issue in Sri Lanka when we talk of the FTA. Then, there is the whole question of moving into services, which are increasingly accounting for a larger portion of the GDP of both our countries. These and many others, however, are not issues that the FTA can fix of and by itself. They require that a new legal framework be put into place. To be frank, I am a trifle puzzled that we can move towards trade in services under the SAFTA framework, but seem to be shy of doing so bilaterally where we can assist each other much more than what might be possible in a regional framework. Providing a bilateral facilitating framework that extends to services and investments is a natural corollary to opening trade in goods.

There is also a perception that India creates new obstacles in the way of free trade such as state taxes, quotas on various items and non-trade restrictions such as on port entry and so on. Let me state first of all that we are not a perfect country. We would like to be, but that is work in progress. Meanwhile, we are making genuine efforts to improve. A proposal for a Goods and Services Tax is in advanced stages of consideration by the government and, when implemented, will lead to one tax for the entire country replacing the multitude of state taxes. With regard to the quotas, they have been liberalized consistently in a way that Sri Lanka is allowed to self-administer them and they seem to have begun to have a positive impact as can be seen in a 136% growth in the export of tea and about 35% increase in the export of garments in 2009, both items where quotas exist. Please note that this is happening in a year when there has been an overall decline of 21.53% in Sri Lankan exports to India. With regard to other restrictions, let me state that there are no Sri Lanka-specific port entry restrictions in India; the countervailing duty on vanaspati has been removed and the condition of import of fabrics to utilize the garment quota has been done away with. India has also expressed its readiness to implement the “garment model” for the administration of the pepper quota, which is expected to be signed shortly. To sum up, most of the implementation issues that have created this so-called “perception” about the FTA have been resolved and others pertaining to NTBs can be resolved if there is will on the Sri Lankan side to move forward with already negotiated frameworks. On a more general level, a country whose imports have often been greater than its exports and whose trade gap has consistently grown in the last six decades cannot surely be deemed as inimical to imports, as some of our critics seem to allege openly. If we take only the recent period from 2003-04 to 2007-08, India’s imports have quadrupled from $78 billion to $251.6 billion. India’s imports from China alone have increased about 7 times from $4 billion to $28 billion. I am afraid that arguments based on individual and selected cases of failure to export do not stand scrutiny in the face of these facts.

Ladies and gentlemen, I do not wish to give the impression that there are no irritants or grievances in the India-Sri Lanka trade discourse. My point is that we have successfully managed to address, resolve and minimize most of these irritants. Even more importantly, such contentious issues as may have arisen have not brought the FTA itself into disrepute. I think the message is that while there have been very significant gains, some pains have also been felt. The cure does not lie in giving the FTA a bad name or seeking from it answers it cannot provide, but in looking elsewhere at a higher purpose and, consequently, higher gains. This means dealing with change. I mentioned Jean Monnet earlier and it was he I think who said that people only accept change when they are faced with necessity and only recognize necessity when a crisis is upon them. Let us ask ourselves whether we need a crisis in order to make the changes that we know from experience will benefit us all in the long run.

With that thought, and since I have seriously overshot the time allotted to me, let me stop here. Once again, I wish to thank the organizers of this event, the Sri Lanka India Joint Business Council, the Indo-Lanka Chamber of Commerce and Industry, the Centre for WTO Studies and the Institute of Policy Studies for organizing this timely conference and for inviting me here this morning.
You have my best wishes.

Thank you