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1. 3/22/2015 Why the Sri Lankan vote matters to India?
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Why the Sri Lankan vote matters to India?
By Sourajit Aiyer
Apart from Bhutan, India hardly had sustained, progressive relations with any other regional country in recent
years. While it made inroads with Sri Lanka, there were tenuous twists even in this relation.
Sri Lankans voted for a new president this month. This vote does matter to India, as it holds the promise of a more
inclusive relationship ­ in geopolitics, trade and investments.
As former president Mahinda Rajapaksa reeled under human rights challenges post the 2009 war, there was a
gradual shift in his stance towards China. This geopolitical shift saw China funding several infrastructure projects
in Sri Lanka. A more worrisome finding was that Sri Lankan soil was being used for Chinese military activity.
Under the new administration, India hopes the motivation for this geopolitical shift towards China might reduce.
The new President Maithripala Sirisena announced in his manifesto that he aimed to maintain equal relations with
India and China, and was concerned about excessive indebtedness to any specific foreign power. Sirisena’s
Prime Minister Ranil Wickramesinghe also announced that they might relook at the Chinese­funded port project
due to environmental concerns. All in all, India hopes that China’s free­run in the country may reduce and this
might help balance the geopolitical equation.
The new administration might bode well for another threat which India was facing. The capture of a Sri Lankan,
Zakir Hussain, in May 2014 brought to light that Pakistani intelligence elements were allegedly setting up training
camps in Sri Lanka and using the country’s Muslim minority to target India’s south. The new president is expected
to put stress on the minorities’ interests, both Tamils and Muslims, a reason believed why Sri Lanka’s North tilted
towards him in the elections.
Enhancement of economic opportunities and education for Muslim youth might help address this challenge,
especially if joining such extremist camps was the only source of income for the unemployed and uneducated
Muslim youth in the rural hinterlands.
Apart from geopolitics, the other impact is related to economic ties – trade and investments. The expectation is that
the new president might bring back focus on economic development, a reason believed why Sri Lanka’s South
voted for him.
Since 2000, the India–Sri Lanka Free Trade Agreement (FTA) has worked to liberalize trade, including
transforming Sri Lanka’s exports from low value primary products to value added processed products. Sri Lanka
has moved from exporting only pepper, nuts, fruit, cloves etc to value added products like insulated wires, cables,
pneumatic tyres, garments, ceramics, tableware, vegetable oils, copper products, furniture, freezers, etc. Imports
from India largely include petroleum products, vehicles, sugar, cotton, pharmaceuticals etc.
However, the challenge is that many items seeing high volumes fall in the FTA’s negative list of products, and
hence, is hardly influenced by it. While both sides have been working on the Comprehensive Economic
Partnership Agreement (CEPA), progress has been slow. The change in government is expected to usher in
much­needed momentum in this.
As the new administration is expected to work towards diversifying its exports, possible opportunities can emerge
for India. Exports have to be a thrust area for Sri Lanka, since the size of its domestic market is limited – its
population is only about 21 million, and the economy cannot achieve scale without global integration. Sri Lanka’s
export basket is currently highly concentrated to specific regions (USA, EU) and products (tea, garments). This
impacted Lankan exports when the West saw a prolonged slowdown.
Export diversification needs to be a priority to make the country less vulnerable to shocks in specific areas. This
thrust towards diversification should bode well for India, in terms of broadening the overall scope of trade between
India and Sri Lanka by enhancing the list of competitive products.
The FTA also placed quotas on tea and garments, which comprised bulk of Sri Lanka’s export basket. The attempt
now should be to maximize Sri Lanka’s exports in its areas of core competencies, as well as reduce any non­tariff
barriers. This would help India eke out maximum quotas for its own exports, in return.
Investments (FDI) from India to Sri Lanka started with bus manufacturing in the 1980s (Ashok Leyland) to sectors
like steel, cement, vanaspati, copper, etc in the 1990s to services like telecom, banking, oil, tourism in the 2000s
(ICICI, Airtel, IOC, Tata). India is now amongst the largest investors in Sri Lanka. Sri Lankan companies have also
invested in India, including sectors like apparel, logistics, hospitality, etc (MAS, Brandix, John Keells, Aitken
Spence). Going forward, Sri Lanka would need investments to develop the new export sectors, to set up the
production facilities and supply chains.
Also, Sri Lanka does not possess the supply capacity to cater to the sizable Indian market. Renewed focus on the
economy should spell opportunities to invest into production in those specific sectors. An option might be to
promote Joint­Ventures between Indian and Sri Lankan companies with buy­back arrangements. CEAT Kelani is a
JV involving India’s CEAT, which exports tyres made in Sri Lanka back to India.
Another challenge for low trade volumes has been that intra­industry integration between the two countries has
not grown much. Sri Lankan manufacturers have not been successful in creating vertical integration with Indian
industries. India’s new National Democratic Alliance (NDA) government has been making efforts to use its
embassies abroad for trade promotion/facilitation. Such facilitation offices on both sides could be useful access
windows to connect potential partners and develop regional value chains in specific industries.
Infrastructure is another area of potential, especially in re­building projects. India’s IRCON participated in
rebuilding the Jaffna­Colombo railway line, and is involved in four rail projects financed by India’s EXIM Bank.
Apart from rail, power generation and transmission, housing and construction, cement and water supply
infrastructure also hold promise in Sri Lanka. NTPC, Tata Housing, L&T, UltraTech and VA Tech Wabag are
already present. In water infrastructure alone, projects worth Rs.21,000 crore are expected to come up, as per Sri
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2. 3/22/2015 Why the Sri Lankan vote matters to India?
http://southasiamonitor.org/detail.php?type=sl&nid=10298 2/2
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Lanka National Water Supply and Drainage Board.
The challenge here for Indian companies is access to cheap funding. This is where China has an edge. Apart from
huge cash piles, China also has a better sovereign rating than India. This means its cost of funding is more
favourable than India. To help Indian companies, India has extended a credit line of $1 billion to Sri Lanka through
EXIM Bank for infra­projects. India also needs to play its geographical proximity to its advantage, which can help
reduce the cost of transporting key raw materials and heavy equipment from India for projects there.
Export of equipment extends to the defence sector. India recently won a contract to supply two offshore patrol
ships to Sri Lanka. These are indigenously built at Goa Shipyard, and used for anti­piracy operations, search­
rescue operations, transportation of troop and cargo, etc. Thus, Sri Lanka can emerge as a key export area for
Indian defence manufacturers.
Services included peoples’ movement for education, healthcare and tourism. More Lankan students and patients
are travelling to India each year, as they face supply constraints domestically. While affluent Lankans generally
travelled to the West, Australia or Singapore for education or healthcare, India is emerging as a viable option for
the middle class Lankans. India could do well to promote its medical tourism and higher education facilities further
in Sri Lanka, including easing the access to such facilities.
Tourism has also picked speed, following visa liberalization and better connectivity. Sri Lankan Airlines already
derives a significant chunk of its income from India, as does a Lankan budget airline. India is also the largest
source of foreign tourists to Sri Lanka. Opportunities exist in hospitality segments like restaurants, hotels and
related supply chain. A stable Sri Lanka should see further tourist inflows from other countries, which Indian
hospitality supply­chain/logistics companies might capitalize on.
There is also potential in information technology. Lankan IT companies are already servicing Indian firms. Sri
Lanka is emerging as a feasible base for analytical work. Copal AMBA has invested in a centre in Colombo. Wage
arbitrage can play a role in moving of IT services from India to Sri Lanka, just like it is moving IT services from
China to Vietnam (as Microsoft did). Wages in India are expected to increase higher relative to Sri Lanka, and this
might make Lankan IT services much more competitive. This includes investments from IT companies looking to
service the Indian market through lower cost centres in Sri Lanka.
(Sourajit Aiyer is a finance professional in India. He can be contacted at contributions@sps.in)
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