A New Page in India - Sri Lanka Relations?

Focus

Rohan Samarajiva insists that for the Indo-Sri Lankan relationship to enter a new page, there needs to be a lessening of the asymmetry, the central characteristic of the bilateral relationship

Asymmetry is the central characteristic of the India-Sri Lanka relationship. More Sri Lankans go to India than to any other country. Indian politics are discussed widely. Even if not always accurately, ideas from India are imported into Sri Lanka. The 13th Amendment imposed on Sri Lanka is anchored on Indian Constitutional practice. Many of the ideas of the home-grown 17th Amendment, now at the centre of discussion, are influenced by India.

However, few in India understand what goes on in Sri Lanka. Many believe that January 8th marked a decisive power shift similar to what happened on May 16th in India last year. They do not understand that we are now in a transitional phase between two elections and that the outcome is contingent on many factors, including constitutional reforms. Even among the elite, it is a common belief that the adversaries of the Sri Lankan forces in the war that ended in 2009 represented Tamils of recent Indian origin. They do not know that the conflict was with those who claimed to represent Tamils of Sri Lankan origin and that the political party representing the Tamils of Indian origin were part of the Cabinet throughout the war as members of different alliances. For the Indo-Sri Lankan relationship to enter a new page, there needs to be a lessening of the asymmetry at least in understanding. But this is unlikely. Instead, trade and energy related issues dominate discussions. Given the significance attached to Chinese submarines in the Colombo Port, it would be a good idea to discuss ports as well.

Trade

Sri Lanka was the first country to sign a bilateral trade agreement with India. It was in line to be among the first to sign a Comprehensive Economic Partnership Agreement (CEPA) that covered investment and services as well. But government changes on both sides in 2004 slowed down the process and then led to its stifling by a highly motivated and connected lobby.

Some of the misconceptions propagated by the opponents were:

• Stopping the CEPA would help resolve the problems experienced with the Free Trade Agreement (FTA) with India, operational since 2000;

• Increased bilateral trade deficits in the first years of FTA were evidence of its failure;

• Sri Lanka’s failure to increase exports to India, especially with regard to its main goods exports, tea and apparel, was entirely India’s fault; and.

• Liberalisation of services trade with India was harmful to Sri Lanka.

It was not that there were no problems with the FTA in its first decade. Multichemi, which led the opposition, succeeded in Bangladesh and not in India. Munchee is a highly successful company that has succeeded both at home and abroad, but was frustrated by court cases in Tamil Nadu, which had little to do with trade rules. Legal-on-paper actions by certain Indian investors to exploit the low duties offered by the FTA by setting up Vanaspati factories in Sri Lanka to export into India were blocked by Indian authorities.

There have also been significant achievements by Sri Lankan companies in India. Colombo Dockyards succeeded in winning multiple government tenders, difficult to do if there was a systematic effort to block Sri Lankan exports. The ‘Amante’brand of lingerie marketed by MAS was rated as the Indian ‘Product of the Year’in 2009 by Nielson.

This is not evidence of a uniform pattern of big brotherly bad behaviour. What the facts suggest is the value of working together to resolve problems especially when both sides are new to trade liberalisation, including through the formal dispute settlement provisions that were not included in the FTA, but were included in the CEPA draft.

The least informed of the criticisms was the claim that rising imports from India were bad for Sri Lanka and evidence of the failure of the FTA. One of the reasons for the increase in Indian exports was the import of petroleum products by Lanka IOC. Another was the substitution of cheap Indian two-wheelers for the Japanese imports of yesteryear. It was silly to claim that obtaining cheaper products from one market instead of another is bad.

There were caps on tea and apparel exports into India from Sri Lanka, both being items exported by the two countries. In an ideal world, there would not be any caps, but the CEPA and preceding negotiations relaxed the conditions of the cap placed by India. Evidence pointed to an earlier lack of interest by Sri Lankan apparel exporters as a contributory factor. There was a 40 percent increase in apparel exports in 2009 over 2008 despite overall Sri Lankan exports to India declining by more than 28 percent in that recessionary year.

There was no opposition to the CEPA chapter that dealt with goods, which simply constituted the FTA provisions with some refinements. What was opposed was the services chapter on the basis of fear mongering about the country being inundated by Indians. This was false because trade agreements do not abrogate immigration laws. However, this was not supported by evidence; Sri Lanka did not get inundated even when visas were granted on arrival.

Movement of Indian professionals under the services chapter was to be limited to those directly attached to Indian firms that invest here (under Mode 3 services trade), except in one or two industries where there were shortages and no industry opposition. Those who raised the bogeyman of Indian professionals coming to Sri Lanka neglected to talk about the few thousands of Sri Lankans working in India on work authorisations, who would have been able to get their visas a lot easier.

Sri Lanka, the smaller partner, needs rules and dispute-resolution mechanisms more than India does. The CEPA is not about deals for setting up export zones, or special dispensation to invest in one or another place. Trade agreements contain rules of behaviour that a business person can depend on; that carry with them consequences if violated. They reduce risk for investors and traders.

The ‘relatives-more-than-friends’ argument that Sri Lankan politicians are happy to trot out in relation to India could be retired for good. Even if relations between officials and politicians are excellent, that modality does not accommodate the need for an aggrieved Sri Lankan investor or trader to have good personal relations with the people in government who can make the call to the ‘relatives.’ International trade relations in this model are akin to how things are done in a government of people, not of laws. Everything depends on who knows whom, and the quality of the relationship. In a government of laws, international trade would also be governed by laws: international agreements well negotiated and implemented without discrimination. One would be entitled to redress, based on rights and obligations embodied in well-drafted agreements.

One-off deals cannot take Indo-Lankan trade beyond $10 billion, as in the days when bilateral relations were said to be governed by the friendship between the Nehru and the Bandaranaike families. At the levels now being discussed, big, continuing transactions by major players are required. That cannot happen without investment and services trade agreements. Tariffs are low; what must now be addressed, even in trade in goods, are non-tariff barriers. In the case of services trade, that is all that matters. And investment is all about estimating and managing risk. Agreements such as CEPA, though imperfect, are needed to manage non-tariff barriers and risk.

While a rule-governed trade and investment between the two countries is absolutely important, the time to revive CEPA is not now; a stable government must be in place. It must be done after robust public debate that addresses all concerns, real or imagined.

Power

One subject that was featured in the Modi-Sirisena discussion was the long delayed coal power station. It came up when President Rajapaksa attended Prime Minister Modi’s inauguration in May 2014. Prime Minister Modi’s visits to Bhutan, Nepal and even the northern regions of India clearly demonstrated his focus on securing low cost, adequate energy for the growing Indian economy.

For the Sri Lankan system, which has a night-time baseload demand of 900 MW, a 500 MW plant is a very big deal. So big, that unless Sri Lanka is connected to the Indian grid by means of a cable across the Palk Strait, the system cannot absorb such a big baseload plant. Experts have communicated this fact and feasibility studies have been conducted. But South Block briefings still give primacy to the coal plant and not to its precondition, which is the cross-strait cable. The cross-strait cable will benefit both the countries. Sri Lanka will be able to accommodate large low cost generating plants; the south Indian states will benefit from more power supplies. The fact that consumption profiles on the two sides of the Palk Strait differ to some extent will be of significance.

It is a good thing that the agreement on civil nuclear power has been signed. Sri Lanka has a legitimate interest in the performance and safety of the Kudankulam and Kalpakkam facilities, being downwind of these two plants. While radical environmentalists may object, it makes a lot of sense to consider building a nuclear plant in Sampur that can supply both India and Sri Lanka with low cost power that does not contribute to global warming.

Ports

An efficient port and good logistic services are among Sri Lanka’s comparative advantages. In 2013, it handled more containers than India’s largest, the Jawaharlal Nehru Port in Nhava Sheva. More than 70 percent of the four million plus TEUs Colombo handles every year are destined for or coming from India.

When plans were being developed in 2003-‘04 for the deep-water extension of the Port of Colombo, it was understood that the new terminals would be offered to foreign operators. The success of the South Asian Gateway Terminal operated by a private entity under a variant of the landlord-port model made this a given. It was hoped that Indian entities would bid. Informal approaches were made. Indian government officials did not take the invitation to bid seriously, and in the end, no Indian entities bid.

So, Sri Lanka went with the willing, who happened to be Chinese. This then caused concern among decision-makers and opinion-leaders in New Delhi. If not managed carefully, these security concerns could result in all sorts of actions against Sri Lanka, including accelerated efforts to develop alternatives to Colombo on Indian soil, or even to compel the use of other transhipment hubs over Colombo.

It must be noted that no argument is being made that Colombo be given any kind of preferential status. Even today, it competes with other transhipment ports on value for money and receives no special treatment.

The Indian National Transport Policy Development Committee (NTPDC) Report issued in early 2014 states:

The performance of Indian ports has generally deteriorated over the years except for a brief period from the late 1990s to the mid-2000s. The gap between the growth in traffic and growth of port capacity is apparently widening. Port traffic is expected to grow by about 40 percent from the current 914 million tonnes to about 1,279 million tonnes by the end of the 12th Plan.

Colombo is at present India’s largest container port. With the opening of the region’s only deep-water facility in 2013, its position as a maritime hub was strengthened. Yet, the Colombo Port’s role in the Indian transport system is not recognised in the NTPDC Report, in contrast to that recognition in the 2003 Joint Study Group Report on the India-Sri Lanka Comprehensive Economic Partnership Agreement. It is time to rethink Sri Lanka’s role in the Indian logistics system. Perhaps President Sirisena can ask for a rethink of Sri Lanka’s role in the Indian logistics system and restoration of the progressive stance set out in the 2003 Study Group Report. He can invite Indian investment in the port terminals and also propose a prior-notification arrangement for visits by any foreign military vessels.

The too-early opening of the Hambantota Port was a mistake. Now that it exists, Sri Lanka’s government has no alternative but to make good use of it. Its potential is tied to Kyaukpyu, a new, deep-water port built by the Chinese on the Rakhine coast of Myanmar, connected to already complete gas and oil pipelines that terminate in China. It has problems, the latest being suspension of the agreement to build a rail line from the port to Kunming in south western China. Even if the rail and highway connections to Kyaukpyu get delayed, it will still attract tanker traffic. If Kyaukpyu becomes a principal route into China, Hambantota will come into its own. But a Chinese presence will be unavoidable.

China has a presence in the Colombo deep-water port and is likely to have one in Hambantota. How can this be managed in the context of India’s security concerns? From time immemorial, Sri Lanka has been part of the Indian system while having significant relationships with China. Balancing these relationships is likely to be the biggest challenge for any Sri Lankan leader.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

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