India signs, Sri Lanka hesitates

By Dhananath Fernando

Originally appeared on The Morning

India has been playing well, not only on the cricket field, but increasingly on the trade field too. Its recent trade agreement with the European Union (EU) will have implications far beyond New Delhi and Brussels. It will have consequences for Colombo as well.

For years, Sri Lanka benefited from the EU’s Generalised Scheme of Preferences Plus (GSP+) scheme. Under GSP+, developing countries such as Sri Lanka are granted zero or preferential tariffs when exporting to the EU, provided they comply with international conventions on human rights, labour standards, environmental protection, and democratic governance.

That preferential access created a clear incentive. Indian investors, who did not enjoy GSP+ access, saw Sri Lanka as a gateway to the European market. Apparel, seafood, rubber products, and several manufacturing segments directly benefited. Some firms chose Sri Lanka precisely because of the tariff advantage offered under GSP+.

But the landscape is changing.

India’s expanded access

With India now signing a comprehensive trade agreement with the EU, the relative advantage Sri Lanka enjoyed under GSP+ becomes less meaningful. If manufacturing in India now receives comparable or preferential access to Europe, the tariff incentive that once distinguished Sri Lanka begins to narrow. Moving a plant to India versus Sri Lanka may no longer differ significantly in terms of EU tariff treatment.

There is also a structural difference worth noting. GSP+ is a unilateral, discretionary concession granted by the EU. It can be withdrawn. A Free Trade Agreement (FTA), by contrast, is a negotiated, reciprocal arrangement between two sovereign governments. It carries a different level of predictability and legal certainty.

Not many people remember that India’s very first FTA with Sri Lanka was the India-Sri Lanka Free Trade Agreement (ISFTA), which was signed in 1998 and came into force in 2000. At that time, both countries were at roughly similar stages in their trade liberalisation journey.

Since then, India has moved decisively, signing agreements covering nearly 60 countries and major economic blocs. The EU deal itself took nearly two decades of negotiation. Meanwhile, Sri Lanka signed agreements with Pakistan, Singapore, and later Thailand, yet questions remain about the depth, utilisation, and consistency of these arrangements. The contrast in trajectory is clear.

India’s expanded access to the EU may even influence other global players. Trade relationships are strategic; one agreement often triggers recalibration elsewhere. When a major market opens up to India, others take note.

Sri Lanka’s reality

For small economies like Sri Lanka, FTAs are valuable tools for securing market access. But we must also be realistic.

Sri Lanka’s economic backbone consists largely of Small and Medium-sized Enterprises (SMEs). Compliance with rules of origin, certification requirements, and documentation under FTAs can be costly and complex. For many SMEs, the administrative burden itself becomes a barrier. Signing an agreement does not automatically translate into utilisation.

FTAs tend to attract larger-scale investors more than smaller domestic firms. Yet even large investors do not come only for tariff concessions. They come for stability, predictability, and policy credibility. A trade agreement cannot compensate for macroeconomic instability or regulatory uncertainty.

That is why Sri Lanka must go beyond simply negotiating more FTAs. We need unilateral liberalisation, simplifying imports and exports, reducing para-tariffs, rationalising Customs procedures, and creating a predictable trade regime. If we are serious about trade-led growth, openness cannot depend solely on negotiations abroad; it must be embedded at home.

India, of course, enjoys structural advantages Sri Lanka does not. It has scale, a vast labour pool, and a large domestic market that lowers production costs. Sri Lanka lacks that scale. But that reality is not an excuse for hesitation; it is precisely why we must integrate faster and deeper into global trade networks.

A simple lesson

One of the greatest advantages of an FTA is predictability. In countries like Sri Lanka, where governance structures are often weak and policy reversals are frequent, even unilateral tariff reductions can be undone with a change of government or pressure from lobbying groups. A binding agreement provides discipline. It locks in reform.

There are also widespread misconceptions about existing agreements. Take the ISFTA. Many assume it benefits India disproportionately. Yet the data tell a more nuanced story.

In 2021, Sri Lanka exported about $ 815 million worth of goods to India. Of that, roughly $ 525 million, around 64%, entered under ISFTA preferences. In the same year, Sri Lanka imported about $ 4.4 billion from India, but only around $ 208 million, less than 5%, came in under the FTA framework.

In other words, most Indian exports to Sri Lanka do not rely on ISFTA concessions; they enter under normal tariffs. By contrast, a significant share of Sri Lankan exports to India depends on the agreement. Even if one believes exports are ‘better’ than imports, the structure of the agreement clearly provides Sri Lanka meaningful access. Removing or weakening it would likely hurt Sri Lankan exporters more than Indian ones.

A similar pattern can be observed under the Pakistan-Sri Lanka Free Trade Agreement.

In this context, the Government’s proposal to remove para-tariffs such as cess and the Ports and Airport Development Levy (PAL) and move towards a four-band tariff structure is commendable. Rationalisation is long overdue. But reform must be consistent. While simplifying tariffs, we must avoid expanding negative lists, the products and services excluded from trade agreements. Expanding exclusions defeats the purpose of liberalisation.

India, for all its political rhetoric, has gradually opened its economy with limited and clearly defined sensitive sectors such as agriculture. In fact, India’s former Chief Economic Adviser recently wrote in The Economist that the country may be on the verge of becoming one of the world’s most open major economies.

For Sri Lanka, the lesson is simple. In a small island economy with limited domestic scale, there is no sustainable alternative to trade reform. Protection may feel safe in the short term, but isolation shrinks opportunity. The solution is not hesitation. The solution is faster, deeper, and more predictable integration into the global economy.

Trade is not a luxury for Sri Lanka. It is a necessity. And the reforms cannot wait.