US embassy cable - 04COLOMBO401

UNCLAS SECTION 01 OF 02 COLOMBO 000401 
 
SIPDIS 
 
STATE FOR SA/INS 
STATE PLEASE PASS TO USTR 
DOC FOR ITA ABENAISSA 
TREASURY FOR RADKINS 
 
E.O. 12958:  N/A 
TAGS: ETRD, ECON, CE, USTR, ECONOMICS, External Relations 
SUBJECT:  Indo-Sri Lanka Free Trade Agreement -- Booming Trade 
 
Ref:  (a) 03 Colombo 001161, (b) 03 Colombo 000772 
 
1.  Summary:  Trade between India and Sri Lanka has grown 
significantly -- by 30 percent in 2003 to USD 1.3 billion. 
Indian exports to Sri Lanka grew by 28 percent and Sri 
Lankan exports to India grew by 43 percent over the same 
time period.  The rapid increase in trade between India and 
Sri Lanka is largely attributed to the Indo-Lanka Free 
trade agreement.  Total trade has doubled since the FTA 
entered into force in 2000.  The two countries are expected 
to enter into an expanded economic agreement covering other 
areas in the near future.  End Summary. 
 
2.  According to Sri Lankan Central Bank trade data 
released on February 26, Indian exports to Sri Lanka grew 
by 28 percent to approximately USD 1.1 billion and Sri 
Lanka's exports to India grew by 43 percent to 
approximately USD 0.24 billion in 2003.  The rapid increase 
in trade between India and Sri Lanka is largely attributed 
to the Indo Lanka Free trade agreement, which entered into 
force in March 2000, although official 2003 FTA related 
trade data are not yet available.  Total bilateral trade 
has doubled since the FTA, increasing to USD 1.3 billion in 
2003 from USD 560 million in 1999. 
 
3.  Under the FTA, India has phased out tariffs for imports 
from Sri Lanka, except for 429 items covered under an 
exempted or "negative" list, and tea and garments, which 
are under quotas or preferential rates.  The most recent 
liberalization was in March 2003, when India removed 
tariffs on 2,799 items.  Consequently, 4,150 items from Sri 
Lanka (with at least 35 percent domestic value addition) to 
India are duty free now.  Sri Lanka has offered 100% duty 
concessions on about 1,100 items.  The import duty on the 
balance is to be phased out by 2008 except for 1,180 items 
on a negative list.  India is the largest exporter to Sri 
Lanka with 16 percent of the market, and the fifth largest 
export destination for Sri Lankan goods with about 5% 
market share.  Sri Lanka is continuing its efforts to 
increase its exports to India under the FTA.  On February 
26, the GSL opened a trade center in Chennai to showcase 
Sri Lankan products, services and companies.  Over 15 Sri 
Lankan companies in various sectors, from apparel and shoes 
to bicycles leased space at the trade center.  Further, 
several third country investors have expanded their 
investment in Sri Lanka to access the Indian market duty 
free, with a required local value addition of 35 percent. 
Among them are US companies Celetron, which exports memory 
modules, and Navini Networks, which exports wireless 
internet broad band routers and modems through its local 
partner. 
 
4.  India and Sri Lanka are now working towards a 
Comprehensive Economic Partnership Agreement (CEPA), to 
expand the cooperation into other areas.  In October 2003, 
a joint expert group made recommendations on a CEPA 
covering four areas: 
 
--expansion of trade through improved market access (trade 
facilitation and removal of non tariff barriers) 
 
--trade in services 
 
--promotion of investment and 
 
--enhanced economic cooperation in areas such as 
transportation, infrastructure, education, tourism and 
information and communications technology. 
 
The latter includes the modernization of Sri Lankan 
railways, and establishment of an educational institute on 
the lines of Indian Institute of Technology.   Negotiations 
and discussions on the draft CEPA were in progress, but due 
to the dissolution of parliaments in both countries, the 
work is currently on hold. 
 
5.  Even without an agreement, the Indian commercial 
presence in Sri Lanka has increased significantly.  India 
is the third largest foreign investor in Sri Lanka. 
According to the CEPA expert study, total Indian investment 
in Sri Lanka over the last decade has reached $400 million, 
and one half of Indian investment in the SAARC region is 
located in Sri Lanka.  Among the top Indian investors are 
the state owned Indian Oil Company, which entered Sri 
Lanka's petroleum retail business in 2003, Apollo hospital 
group, and TATA.  Indian investments are also visible in 
the tourism sector.  Further, many Indian nationals are 
working in Sri Lanka including doctors, nurses, advertising 
and banking professionals.  Sri Lankan investment in India 
has also increased, though in overall terms it remains 
miniscule (approximately USD 4 million). 
 
6.  Comment:  The US should consider the improving trade ties 
between India and Sri Lanka (and possibly even wider 
regional trade ties with the advent of the South Asia Free 
Trade Agreement process) as it ponders next steps on a US- 
Sri Lanka FTA.  As mentioned above, firms that add at least 
35 percent value for many products can then import into 
India duty free.  At least two US firms are currently 
taking advantage of this feature.  One exports refurbished 
microchips, the other assembles broadband wireless base- 
stations.  Both have seen duties on their products into 
India reduced from over 35 percent to zero. End comment. 
 
ENTWISTLE