Hon’ble Mr. Ajith Nivard Cabraal, Governor, Central Bank of Sri Lanka;
Mr. K.G.D.D. Dheerasinghe, Deputy Governor;
Mr. P.D.J. Fernando, Deputy Governor;
Distinguished Guests.

I am honoured to be invited to the 60th Year Anniversary Oration Series of the Central Bank of Sri Lanka.

At the outset, let me compliment the Central Bank of Sri Lanka for the manner in which it has been able to successfully guide the economy of Sri Lanka towards stability and growth during the last six decades. The Bank has played a stellar role in steering the country through turbulent and taxing periods of history, including prolonged domestic strife and several regional and global economic crises. The past five years have been particularly challenging but under the leadership of Governor Ajith Nivard Cabraal, the Central Bank of Sri Lanka has risen to the challenge. It can take legitimate pride in its achievements and its record of professionalism.

I am delighted to address this distinguished forum at a time when Sri Lanka is well positioned to forge ahead, as an economy, as a society, as a country, after three decades of internal conflict. The conflict was holding back the country from realizing its full and immense potential. Today you are poised to take advantage of the peace dividend and move towards reconciliation, peace, prosperity and development. India, as your closest neighbour and friend, is prepared to be your partner in this journey. It is, therefore, appropriate that I have been asked to speak on the theme of India-Sri Lanka economic partnership.

This economic partnership is a key dimension of the vibrant and multi-faceted relationship that happily exists between our two countries. It is a dynamic relationship, yet it is deeply anchored in our shared civilisational heritage, common values and convergent interests. It is a relationship which is free of any significant disputes or conflict of interests. Indeed, our destinies are interlinked. There are no doubt occasional issues, like straying fishermen, but they can be amicably handled as long as we keep our eye on the big picture of bilateral relations. It is recognised on both sides that with the end of armed conflict in Sri Lanka, robust economic growth in the two countries and other positive circumstances, we are today in a position to take this relationship forward in a comprehensive manner, proceeding from a strategic perspective.

While the bilateral context is no doubt favourable, I would suggest that the emerging global and regional economic scenario also calls for a deepening of the economic partnership between India and Sri Lanka. Let me flag some broad trends and key developments here.

We are today in the midst of an uneven and fragile recovery from one of the worst global economic crises. While the global economy was estimated to have grown rapidly in 2010 by 5% and is projected to grow at about 4.5% this year, the growth process is two-paced: growth in emerging economies is strong but with signs of overheating, while advanced economies are growing slowly and facing uncertainty with large fiscal deficit and high public debts and unemployment levels. There is a marked shift in global economic power to the emerging economies, in particular those in Asia. This could be a defining feature of the global economy for many decades to come. The key conclusion of the PricewaterhouseCoopers report “The World in 2050” is that the global financial crisis has further accelerated the shift in global economic power to emerging economies. Measured by GDP in PPP terms, the largest E7 emerging economies seem likely to be bigger than the current G7 economies by 2020, and China seems likely to have overtaken the US by that date. India could also overtake the US by 2050 on this PPP basis.

While it is extremely difficult and somewhat risky to extrapolate present trends far into the future, some facts are reasonably clear. One of the dominant themes of the coming era will be the shift in the centre of gravity of global economic landscape from advanced economies to emerging economies, particularly those belonging to Asia.

Both India and Sri Lanka must factor in this key trend into their economic policies. For Sri Lanka, for instance, this will involve reorienting exports from its traditional markets in the USA and Europe towards the fast-growing Asian economies and increased regional integration. This point was forcefully made by Deputy Managing Director of IMF, Naoyuki Shinohara, at the 46th SEACEN Governors Conference on 25th February 2011.

Fortunately, South Asia is a key beneficiary of this tectonic shift taking place in the global economic landscape. Traditionally, South Asia had been labelled as a region of underperformers. Fortunately, we have left this tag behind us. South Asia is no longer a laggard; it is now one of the fastest growing regions of the world. Within South Asia, India and Sri Lanka are among the high achievers.

Sri Lanka has emerged relatively unscathed from the global economic crisis and is back on track in terms of robust economic growth, growing at a pace faster than most of the countries in the world. One fact which is often overlooked is that during the period 2004-2008, despite the tsunami, despite debilitating internal conflicts, despite the global economic crisis, Sri Lanka continued to grow at a rate of 6% per annum. In 2009, the economy grew by 3.5%, a commendable achievement. The growth rate is close to 8% in 2010 and the outlook for coming years is most promising. There are key challenges to overcome but I am confident you will do so. 

India too has also emerged relatively unscathed from the global economic crisis. Over the past twenty-five years, India has been growing at an average of over 6% per annum. Real GDP growth rate averaged 7.3% in the last decade, catapulting Indian economy to the status of the second fastest growing large economy in the world.  Prior to the onset of the global economic crisis, Indian economy grew at an average annual of 9.5% for three consecutive years.  During the two years of global economy crisis, the economy slowed down but still grew at the rate of over 7%. There has been strong recovery since then. According to the Economic Survey released on 25th February 2011, in the current fiscal year of 2010-11, the Indian economy is expected to grow at a rate of about 8.6%.  In the next fiscal year of 2011-12, the Finance Minister in his budget speech has projected a growth rate of 9%. In the medium term, we are fairly confident that we will achieve a growth rate of 9 %.

Indeed, various projections, including those made by the IMF, suggest that Indian economy will continue to grow at the rate of 8 – 9% in the years to come.  The challenge before us is to take it to a double-digit growth rate because we have to overcome a vast backlog of poverty which will be possible only if the economy continues to develop at a fairly high rate and on a sustained basis for at least 20 years or so.  This is achievable but there are major challenges to be faced, challenges that are both structural and relatively short term. For instance, today, the biggest challenge we are facing is how to control inflation. 

In his budget speech earlier today, India’s Finance Minister mentioned that food price inflation which had gone up to almost 20% per annum has now come down to 9.3%. It is still far too high.  Controlling inflation will require a lot of effort on our part.

There are several other areas where we face huge challenges, despite sustained growth in the last quarter of a century.  The unfortunate fact is that we have nearly 3 billion people in India who are below the poverty line. It is also a fact that in terms of human resource indicators, India’s performance has been quite sketchy. Indeed, Sri Lanka has done so much better compared to India. These are challenges that we need to overcome, including a deficit of infrastructure.  There are the problems pertaining to good governance that we need to address. But today, we are confident about a high trend-line for the future. Today, if you visit big cities or small towns or villages of India, there is strong optimism and this, along with other factors, gives us confidence that in years to come the Indian economy will grow continuously at a rapid pace.

Friends, we thus have to take into account the fortunate conjunction of both the economies of Sri Lanka and India growing at a relatively rapid pace in the years to come. This will create a positive climate for a closer economic partnership between our two countries. Fortunately, there is also a great synergy in our respective visions for development.

Prime Minister Dr. Manmohan Singh has an abiding vision of a prosperous South Asia, in which all countries of the region are growing together. This implies, on India's part, providing preferential and asymmetrical access to its markets, sharing the fruits of economic growth and advances in science and technology with its neighbours and helping build their capacities in the socio-economic sphere by providing development assistance. This approach has been demonstrated on the ground in the India-Sri Lanka Free Trade Agreement and in our approach towards the proposed Comprehensive Economic Partnership Agreement with Sri Lanka. The FTA which was signed between India and Sri Lanka in 1998 and operationalized in 2000 was based on a set of asymmetrical obligations. India was prepared to give concessions without demanding reciprocal concessions from Sri Lanka. We have adopted this approach as a matter of deliberate policy choice. I will come back to this point a little later.

There is also a growing realization within the region, that the economic growth of India presents opportunities for the neighbourhood rather than being a challenge or a threat.

Coming to Sri Lanka, President Mahinda Rajapaksa has expounded his vision of Sri Lanka’s future as an economic hub.  While presenting the budget on 22 November 2010, President remarked: “The global economy is slowly recovering with a growth rate of around 5%.  More encouragingly India, China and all other major countries in Asia are providing a major impetus for regional and global growth that is beneficial for us.  This is why in ‘Mahinda Chintana – Vision for the Future’ we projected Sri Lanka as a dynamic global hub.  Taking advantage of Sri Lanka’s strategic location, our next massive leap forward is to develop our motherland as a naval, aviation, commercial, energy and knowledge hub being a key link between the east and the west.” 

Let us see how the India-Sri Lanka economic partnership can contribute to the realization of this vision of Sri Lanka as a dynamic global hub.

Accelerated economic development of a continental size economy like India’s obviously creates significant opportunities for the neighbourhood, particularly for Sri Lanka which is already our leading economic partner in South Asia.  In the South Asian context, India and Sri Lanka are natural partners. 

There is already a critical mass in economic engagement between India and Sri Lanka. Let me outline here nine thrust areas and building blocks in our partnership on the basis of our present achievements and future prospects.

The first is the objective of expanded trade in goods. India-Sri Lanka FTA, which I referred to earlier, came into force in 2000. This was first such agreement signed by both countries. FTA was signed because of the vision of the leaders of two countries because until then neither of us had concluded FTA with any other country. Ten years of operation of the FTA has many achievements and created a strong foundation that we can build upon. Bilateral trade expanded five times between 2000 and 2008 to reach US$ 3.3 billion. There was a temporary dip in 2009 because of the global economic crisis, but these has been steady sharp recovery in 2010 with bilateral trade estimated to increase by more than 30% to cross US$ 3 billion.  Exports from Sri Lanka to India increased by 30% and imports by 32%. Over the past decade, Sri Lankan exports grew at a much faster pace than Indian exports.  This was not accidental but as a result of well thought out measures, where India made greater concessions and at a much faster pace than what it expected from Sri Lanka in return. 

Today, India is the largest trade partner of Sri Lanka and Sri Lanka is India’s largest trade partner in South Asia.  In 2000 when we operationalized FTA, India was number 16 in Sri Lanka’s export destinations. Today it is number three. Sri Lanka’s imports and exports from and to India have come down in proportional terms from 10:1 in 2000 to 1:5.5 in 2010. There has been a marked improvement in this area.

Future prospects are even better given the steadily increasing globalization of Indian economy. Trade in goods and services already accounts for nearly 50% of the GDP of India.  On the trade front (trade in goods), the country is poised to go well past the milestone of US $ 200 billion of exports in the current fiscal year.  On the import side, India’s imports are likely to be well in excess of US $ 300 billion dollars this year. India will have trade deficit of over US$ 100 billion dollars in current fiscal year. There is readiness to accept a large trade deficit in view of growing demand of Indian economy and robust capital inflows. 

Clearly, there are opportunities for Sri Lanka to significantly expand its exports to this fast and growing market in the neighbourhood. India is importing goods worth about US$350 billion per annum but Sri Lanka’s share is just about US$ 500 million. Thus, there is a lot of scope for improvement.

The second thrust area relates to Indian investments in Sri Lanka and Sri Lankan investments in India, which have also grown substantially in recent years. India is among the four largest investors in Sri Lanka overall. It is not just the numbers but the quality of Indian investments that need attention.  Some of the best known Indian companies are present in Sri Lanka today.  

In recent years, we have witnessed phenomenal growth of Indian MNCs which are seeking to expand their footprint across the globe. In the last 10 years, the outward FDI from India amounted to more than US$ 75 billion.  In 2008-09, Indian companies invested US$ 17.5 billion outside the shores of India and in 2009-10, the corresponding figure was $12 billion which adds up to $30 billion in just two years. Clearly, there are significant opportunities for Sri Lanka as far as attracting a share of Indian investment.

Equally important is that the flow of investment is not unidirectional.  Sri Lankan companies like Brandix, MAS Holdings, John Keells and Aitken Spence have sizeable and expanding presence in Indian market. Through their presence in Indian market they have achieved economies of scale. Going beyond, we see that Indian markets can become a springboard for emergence of world class Sri Lankan brands. I have no doubt about it.

A third and related area is capacity creation in Sri Lankan economy, including for exports, both in manufacturing and services segments. Indeed, it is going to be a key challenge for Sri Lanka to increase its share in global exports which has been coming down in recent years. One critical requirement here will be capacity building. Here I would suggest that the growing appetite of India’s market has already triggered growth in different sectors of the Sri Lankan economy and prospects are very encouraging in years to come, both in manufacturing and services segments.   Let me elucidate this point with some examples.

In manufacturing, Colombo Dockyard is good example. I have been to Colombo Dockyard for three commissioning events in the past one year. Government of Lakshadweep ordered two passenger ferry vessels from Colombo Dockyard, which are the first of its kind manufactured in Colombo Dockyard. Most recently, I had the pleasure of attending commissioning of platform support vessel ordered by Greatship India Limited (GIL) worth US$ 26 million at Colombo Dockyard. I was pleasantly surprised to know that, this one Indian company has ordered 11 vessels with a value of US$ 240 million. The emergence of Colombo Dockyard as a base for ship repair and building has been facilitated by linkages with the Indian market. The point I am trying to make that the growing appetite of Indian market can trigger new capacities in Sri Lanka for consumption in your neighbourhood.

The prospects are even more impressive in the services sector. The services sector already accounts for 58% of the Sri Lankan economy. In recent years, Sri Lanka has emerged as an aviation hub and an important contributing factor has been that Sri Lankan Airlines operates nearly 100 flights per week to six destinations in India and the number is likely to increase. Sri Lankan Airlines has become one of the largest foreign airlines operating in India. Its maintenance arm has won service contracts from many Indian airlines, including IndiGo, which has just placed the largest order in the history of civil aviation for passenger aircraft. This has further expanded the potential market for Sri Lankan maintenance services.

To give you another example, Colombo Port’s status as a regional hub rests on attracting over 70% of its container trans-shipment business from India.

Indeed, Sri Lanka should look to leveraging the growth of India to its advantage and position itself to provide a host of services to the growing Indian market.

A key challenge for Sri Lanka will be how to tap the vibrancy of the private sector which is emerging as the key driver of growth in India. It is important to create a facilitating business environment. Important initiatives were taken in the last budget of the Government of Sri Lanka. There is a need to move towards a more transparent and predictable investment climate. Going by the number of queries and concrete projects in pipeline I am confident that in coming months and years there would be sizeable private sector investment from India. 

The fourth thrust area I would like to highlight is the knowledge partnership. Both our countries place a special premium on knowledge as a key driver of growth. Given its relatively narrow natural resource base, Sri Lanka has to consider its people as its most valuable resource. With a skilled, well educated and properly trained population, there is no reason why Sri Lanka cannot provide a reasonable alternative to other similarly sized nations who also do not enjoy any particular natural resource advantage but have nevertheless become bases for high value service industries. The growth of India will automatically imply that it will have the ability to absorb the surplus capacities in services or manufacturing that Sri Lanka can provide. To benefit from this scenario, however, will require that the Sri Lankan population be equipped with the requisite skill sets and that the institutional framework to provide for such exchanges to be in place. Therefore, partnership in education and human resource development is going to be a core component of our economic partnership.

Science and technology is another key area of partnership. India today is home to one of the world's largest pools of scientific and technological manpower. In many areas, Indian scientists and technologists are working at the cutting edge of research. Many multinational companies have their R & D facilities in India. For example, GE’s research facility in Bangalore was believed to be the largest collection of PhDs under one roof anywhere in the world.

Apart from commercial applications like telecommunications, India has gained a lot of expertise in the application of advanced technologies to social sector needs, such as education and health. Satellite based systems are increasingly being used to generate better weather forecasting, warning fishermen from dangerous seas and agriculturists about inclement weather. These are some obvious areas of cooperation that we need to tap and build upon. Advances in the field of IT now allow farmers to stay in touch with their eventual markets and stay informed on movements in market prices so that they can be assured of a fair return on their produce. Satellite enabled distance education has helped us take the fruits of education to previously inaccessible areas, spreading knowledge on the wings of technology. Tele-medicine networks are proving crucial in saving lives.

A shining example of such cooperation is the pan-African e-network that has been piloted by India in 47 African countries and where the basic objective is to assist Africa in capacity building by way of imparting quality education to 10,000 students in Africa over a five-year period in various disciplines from some of the best Indian Universities and educational Institutions. Tele-medicine services are also included by way of online consultation at various hospitals or patient locations in Africa by Indian medical specialists in various specialities.

Indeed, we have offered to the Government of Sri Lanka a tailor-made programme specially designed for Sri Lanka by the Indian Space Research Organization that integrates tele-education and tele-medicine and also provides for village resource centres that can be the nodes for such a system.

Tourism is another major building block of the economic partnership we are seeking to forge between our two countries. India has emerged as the number one source country for tourist arrivals in Sri Lanka. According to your Government’s projections, you are hoping to attract 2 million foreign tourists by 2016, of which 25% are expected from India, which is an achievable number. Outbound travel from India is likely to grow five times to 50 million people by 2020 as compared to 11 million currently as per the World Tourism Organization. Indians are among top spenders when they holiday abroad.  In fact, they are the 7th biggest spenders in the world. Sri Lanka has so much to offer as a tourist destination and I expect a major surge in tourist arrivals from India in years to come.

Improved connectivity ought to be another thrust area in our partnership since it is absolutely vital to the realization of Sri Lanka’s vision of an economic hub. Further developing and expanding the scope of current transport linkages between India and Sri Lanka should be a priority for both our countries. Here again, the size of the Indian market, present and future, provides huge opportunities for Sri Lanka. We discussed earlier how the Indian market has helped in emergence of Sri Lanka as an aviation hub. India is providing technical and financial assistance to rehabilitate the railway networks in northern and southern Sri Lanka. During the visit of H.E. the President of Sri Lanka to India last year both countries decided to restore traditional linkages by resuming ferry services.  Within next few weeks we hope to start ferry service between Colombo and Tuticorin and within the next year or so between Talaimannar and Rameswaram.

Eventually, with the completion of the northern and southern railway projects and operationalization of the ferry services between Tuticorin and Colombo and Talaimannar and Rameswaram, the rail-sea network will help bring people and markets on both sides closer together, in turn creating new markets, including in tourism and expanding economic opportunities across a whole range of sectors, buttressing closer people to people contacts, which is the bedrock of the partnership between India and Sri Lanka.

Our two governments are taking several other initiatives to enhance connectivity. We have started work on the rehabilitation of the Kankesanthurai Harbour in the North. India is also helping develop Palaly as a civilian airport which will both serve the domestic market and link up with destinations in southern India in particular. Once these linkages across various transport networks are restored and reinforced, there is bound to be development of local as well as regional economies to the mutual benefit of the people of both countries. Likewise, inter-connection of electricity grids will facilitate Sri Lanka’s emergence as an energy hub. A feasibility study on this has already commenced. 

The eighth dimension of our economic partnership relates to development cooperation. India is not a donor country. Indeed in terms of per capita income, you are well ahead of India. Your per capita income is double as much as India’s. We step in as a partner and whatever developmental assistance is provided by us is entirely based on the priorities set by the Government and people of Sri Lanka. In recent months, our development assistance has been stepped up significantly to meet the challenges of reconstruction and resettlement in the North and the East of Sri Lanka. But without going into detail let me mention that our engagement is increasingly acquiring a pan-island footprint.

One last point I would like to highlight is the recognition by the leaders of our two countries that it is imperative for the two countries to move towards closer economic integration.  During the visit of the President of Sri Lanka to India in June 2010, he and the Prime Minister of India recognised the need for building on the progress achieved through the India-Sri Lanka Free Trade Agreement and the two leaders directed the officials to hold intensive consultations towards developing a comprehensive framework for sustainable economic partnership between our two countries. This process, I am happy to say, has commenced in November 2010.

There is a unique opportunity today to bring about a quantum leap in economic relations. If we want to take advantage of this historic opportunity, a minimalist or incremental approach will not do.  I believe there is a strong case for adopting a bold and proactive roadmap for enhanced economic engagement between our two countries.

Above all in this process, the governments of the two countries would have to play the role of facilitators by creating new frameworks and mechanisms that expand the coverage of our linkages to new areas even as we take firm and effective steps to address the existing problems in bilateral trade and economic cooperation. We would need to create an enabling environment for trade in services that account for more than 55% of share of our respective economies. The FTA which was concluded in 1998 and operationalized in 2000 covers only trade in goods. We need to stimulate bilateral investment flows by creating a facilitating environment for investors so that growing investments can enhance Sri Lanka’s export capacities and help it balance bilateral trade better. We also need to enter into agreements that remove bottlenecks to exports by harmonizing our testing, certification, quarantine and customs requirements so that our products can enter each other’s market without delays and hindrances that we have encountered in the past. All this will require the creation of an upgraded framework for bilateral economic engagement.

Such an initiative would contribute to the goal of converting Sri Lanka into an economic hub of the region, utilizing its strategic location in the Indian Ocean region in immediate proximity to a large market of 1.1 billion people and astride a major East-West maritime route.  

Let me clarify here a few points about the proposed Comprehensive Economic Partnership Agreement (CEPA) because there is some apprehension in this regard. When we seek a more comprehensive framework for economic partnership, our principal objective is not to seek preferential market access to Sri Lanka, whether for our goods and services. As in the case of FTA, we, in India, would remain cognizant of our responsibility to address the issue of asymmetries in the size of our two economies, so that benefits of such an arrangement are equitable. Any upgraded framework will be based on differentiated obligations, and not reciprocity. Concerns about Indian goods and services overwhelming Sri Lankan markets mostly stem from ignorance of the contents of the document under discussion. Besides, Sri Lanka can move at its own pace. However, delay has its opportunity cost.

We must recognize that today over 50% of global trade is conducted within FTAs and RTAs. We don’t have the luxury of opting out of this process. In India, we are seeking an upgraded framework of economic engagement with several other partner countries. During the past fortnight alone, we have signed CEPA with Japan and CECA with Malaysia. Last year, an FTA in goods with ASEAN and CEPA with South Korea were put into operation. We have agreed on the contours of an ambitious package with the EU, which is likely to be concluded in the near future.  The short point I am trying to make is that we are seeking upgraded trade and economic engagement with a whole lot of other partner countries and we are desirous to do that with Sri Lanka as well at a pace that you are comfortable with.

Historically, South Asia has been at the vanguard of human civilization.   We had fallen behind due to a variety of reasons.  Fortunately, as I mentioned earlier, South Asia is no longer seen as laggards. In the past decade or so, we have achieved a fairly rapid and sustained economic growth. As India seeks greater integration with economies around the world, it must fully engage its neighbours, with whom its destiny is interlinked. The countries in South Asia must have mutual stakes in each other’s prosperity and growth. But it is entirely up to Sri Lanka to decide how it wishes to partake of growth opportunities in the neighbourhood.

During the last decade or so, we have witnessed re-emergence of Asia. Both India and Sri Lanka must play key roles in this exciting saga which is unfolding. We must do so as the closest of neighbours and partners whose destinies are interlinked. On our part, India is committed that this partnership fully safeguards Sri Lanka’s interests. It is a partnership based on mutual respect and sensitivity to each other’s concerns. We must not let imaginary fears come in the way of utilizing this partnership as a key driver of Sri Lanka achieving its manifest destiny of emerging as a major economic hub of the region.  

Thank you.