On 29th December 1998, India and Sri Lanka signed a landmark agreement to establish a bilateral free trade area to promote economic cooperation which became operational in March 2000. The Free Trade Agreement (FTA) was expected to spur Indo-Sri Lankan bilateral relations and Sri Lankan exports to India.

After the operation of this agreement, Sri Lankan exports to India reached the highest ever value of Rs.16,153 million (US$167.7 million) in 2002 far exceeding the Rs.6,266 million(US$69.4 million) worth of exports in 2001- an impressive growth of 158 per cent. Imports from India have increased by 49 percent. Moreover the import-export ratio has improved from 16:1 in 1998 to 5:1 in 2002. It is reported that Sri Lankan exports to India accounted for 3.6 percent of overall Sri Lankan exports in 2002 in comparison to 1998, when Sri Lankan exports to India accounted for 1.0 percent of overall exports. The Indo-Sri Lanka bilateral free trade agreement (ISLBFTA) has paved the way for a large number of copper industries to mushroom in Sri Lanka to cater to India’s growing demand. On March 31, 2003, Indian Government granted 90-100 percent duty exemption on 2,799 more items, which were in the residual list. Consequently, the duty-exempted items for Sri Lanka have increased from 1,351 to 4,150. The Indian Government also relaxed market access restrictions on garments and tea consequent to the last Joint Ministerial Meeting in New Delhi in June 2002.

The ISLBFTA has taken bilateral trade to over a billion dollars which is a major achievement for both India and Sri Lanka. But to reap additional benefits from it, the area of coverage under economic cooperation has to increase, for which both countries are looking at an “FTA Plus” arrangement, which is likely to cover investment, services and intellectual property rights.

Because of positive developments under these agreements, both have agreed to begin negotiations on a Comprehensive Economic Cooperation Agreement (CECA) by 2004. India has proposed the introduction of a “licensed fishing” arrangement with Sri Lanka for a “humane and compassionate” approach to the problem of fishermen straying into each others’ territorial waters. In the field of tourism also both countries have shown great interests for its development. As far as security issues are concerned, both the countries have agreed to enhance defence cooperation which would include training of Sri Lankan Security Personnel by India and consultations between the defence chiefs of the two countries.

For the enhancement of economic cooperation in South Asia, both countries have agreed that a non-traditional route of economic integration needs to be explored. Because if the deepening of economic cooperation is to take the traditional route, the ISLBFTA should now move towards a customs union where both countries will have to maintain common external tariffs to the outside world which is not feasible on political economy grounds. Consequently, moving to a common market and beyond is constrained by this reality. Sri Lanka believes that it is desirable to consider a non-traditional approach like the Japan-Singapore Economic Partnership Agreement to broaden the areas of economic cooperation.

These reciprocal trade relations between India and Sri Lanka would make a major contribution to the political and economic stability of Sri Lanka in which India has a major interest. It would at the same time support India’s economic reform process by providing an export-platform in Sri Lanka for joint Indo-Sri Lankan market and the outside world. Sri Lanka is also seeking more Indian investments in Sri Lanka. FICCI and other agencies are already involved in business tie-ups. Many Indian Industries look at Sri Lanka as an ideal platform to go global.

India is the South Asian Region’s leader and must provide the leadership to pull South Asia forward. Unless India moves ahead and puts SAFTA in place in the next few years, we will be overtaken by other regional movements and trade blocks.

However Sri Lankan diplomats agree that a solution to the ethnic problem can provide a major boost to Sri Lanka’s economic development efforts. Economics presently dominates the substance of Indo- Sri Lanka diplomatic relations. Yet all these are taking place in the shadow of the continuing failure to resolve the Island’s ethnic crisis. The Sri Lankan economy cannot achieve its potential without peace and security. But that is another open ended question.

Reciprocal trade relations and evolving bilateral security linkages have helped in bringing India and Sri Lanka closer to each other. It has also ensured a stable neighbourhood for India. The real challenge to Sri Lanka comes from its ongoing inter-ethnic conflict, which it has to resolve itself.