TRADE ISSUES

Driving a hard bargain

India and Sri Lanka are unable to agree conclusively on their free trade agenda.

V.S. SAMBANDAN
in Colombo

THE Indo-Sri Lankan Free Trade Agreement (FTA) was signed amidst some hype by Prime Minister Atal Behari Vajpayee and President Chandrika Kumaratunga on December 28, 1998, but its operationalisation is still a distant dream. The expectations that surrounded Kumaratunga's visit to New Delhi, the high point of which was the signing of the FTA, have evaporated. The two nations have stepped into a bargaining mode over the contents of their negative lists. If the original intent was to finalise the lists "within 60 days of the agreement", the only indication of forward movement at present is expression of optimism that the contentious issues will be sorted out eventually.

What should have been a matter of dotting the i's and crossing the t's has become bogged down in a mire of conflicting interests, manifested by concerns about the impact bilateral trade in tea, garments, automobiles and auto spares would have on the two economies.

Commerce Secretary P.P. Prabhu's visit to Colombo in May signalled India's interest in operationalising the FTA. After talks with Sri Lankan officials, the Indian delegation felt that there was a "convergence of views" but "certain issues remain to be resolved." New Delhi's approach has been to accept some Sri Lankan demands without compromising Indian interests. Indian officials said that India would consider placing restrictions on certain items under the accord. While such a move would ensure that India provides access to key products from Sri Lanka, it would also help address India's domestic concerns.

As India has removed non-tariff barriers for all member-states of the South Asian Association for Regional Cooperation (SAARC), the present stand would be to bring in tariff quotas for specified items, such as tea and garments, because of the high economic stakes involved on both sides of the Palk Straits. Sri Lanka's obligations in this regard would include providing access to products from India for which there is no significant manufacturing base in the island, such as electrical goods, automobile components and pharmaceuticals. With regard to products for which the island does not have a manufacturing base but from which it earns considerable revenue - motorcars, for instance - a more flexible attitude is likely to be taken by India, given the revenue sensitivities of the island's economy.

India's biggest advantage would lie in getting Sri Lanka to open up its markets for products in sectors in which the island has neither a manufacturing base nor revenue-earning capacity. The creation of joint ventures also has been an important part of the agenda. Possibilities for joint ventures exist in sectors such as electrical goods, dyes, chemicals and pharmaceuticals.

India is concerned about opening up its markets to Sri Lankan tea as it would directly affect the tea industry in South India. On its part, Sri Lanka is reluctant to give up the revenue advantage from automobile imports. The Indian negotiators appear to have appreciated this point. However, with regard to the automobile spare parts and electrical products sectors they believe that the Sri Lankan market would be served well by imports from India.

Beyond the tedious bargaining, the basic determinant of the direction in which the FTA would move remains the larger domestic interests of the two nations. India could be handicapped by Sri Lanka's "perceptions" about its economy being swamped by exports from India. According to sections of the media and public opinion in Sri Lanka, the deal was signed without taking the Sri Lankan public into confidence and India would gain at the cost of "Sri Lanka's competitiveness" internationally.

The Government's response was tepid, and it was the state-run media that made some efforts to counter such apprehensions. Indian diplomats organised interactive sessions, which were well-attended, to quell the doubts troubling Sri Lankan businessmen. The Sri Lankan Government, however, evaded a formal response to the question that dominated the public mind - the "secrecy" behind the agreement.

As the Provincial Council elections had followed the signing of the FTA, the issue was put on the back-burner. The Sri Lankan Government seems to lack the political will to take the FTA out of cold storage. In a nation where emotional slogans can tilt the electoral balance, none of the major parties has given prominence to the fast-track trade agreement with the island's closest and largest neighbour.

SHANKER CHAKRAVARTY
President Chandrika Kumaratunga and Prime Minister Atal Behari Vajpayee sign the agreement to establish a bilateral free trade area, on December 28 in New Delhi.

Even enthusiastic businessmen were aware that there would be a protracted phase of hard bargaining. Trapped in the muddle of vested interests and powerful lobbies, the well-intentioned efforts of the signatories of the agreement seem to have been watered down and the hopes for a new dimension in Indo-Sri Lankan relations belied.

While the FTA provides a fast-track approach to Indo-Sri Lanka trade, it has to be seen alongside two other initiatives at the regional level - the unilateral offer of greater market access for products from SAARC member-states and the moves towards integration with the World Trade Organisation (WTO), which would alter the global tariff scenario.

In this backdrop, any move to operationalise the FTA assumes significance because the earlier this is achieved, the sooner will the two nations get a foothold in each other's economy. This would give them a chance to adjust to the scenario that would unfold in the wake of global integration.

Given that the agreement allows bilateral interests to transcend economic factors, any forward movement would depend on how the two nations proceed, keeping their mutual interest in mind. There is a perception that domestic electoral compulsions will drive the Opposition, particularly the United National Party (UNP), to oppose the agreement. Maintaining the position that it will be able to comment on the FTA only after the details are arrived at, the UNP has said that "in principle" it would favour closer economic interaction with India.

The radical Left party, the Janata Vimukthi Peramuna (JVP), which is improving its position in the island's politics, has said that it opposes the agreement because "Sri Lankans were not taken into confidence" and not because the agreement involves India. It views the FTA as an agreement that the Sri Lankan President entered into "to show Sri Lanka that something was achieved"; it says that the FTA is "dead" as it has not taken effect.

The fact that India prepares for Lok Sabha elections and Sri Lanka heads towards the next round of parliamentary and presidential elections is also important, for political changes in the two countries will also have an impact on further movement of the agreement. As the prime mover of the FTA, Kumaratunga's directives will be an indication of Sri Lanka's intentions. Given the high-voltage nature of Sri Lankan politics, cautious regard of mutual intentions will determine the course of the FTA.