ECONOMYNEXT – India and Sri Lanka are likely to sign a new trade deal by December and both countries should be more open in order to improve competitiveness and attract foreign direct investments, said Indian Council for Research on International Economic Relations Chief Executive Rajat Kathuria.
"There is optimism that Economic and Technology Cooperation Agreement may be signed by the end of this year. Given the difference in market size one country will inevitably run a current account deficit and in this case it will be Sri Lanka," Kathuria said addressing the Sri Lanka Economic Summit in Colombo Friday.
Kathuria argued that a trade deficit is not necessarily bad as long as opened access to growing markets.
"China, South Korea and Japan benefited by opening their markets because domestic markets alone will not generate enough growth. This is something we need to realise," Kathuria said.
Nationalists in India and Sri Lanka point to trade deficits with individual countries to argue against free trade agreements.
"India feels it got is fingers burned with free trade agreements with Japan and South Korea, so now it’s taking things slow with the RCEP trade deal (with ASEAN and other countries) because it fears China will swamp the market. India also has a trade deficit with China.
"The immediate reaction is we didn’t negotiate our trade agreements properly. While that may be so, and I don’t agree with that argument, there is another reason. Perhaps India is not competitive enough," Kathuria said.
He said Sri Lanka shared the same anxieties about free trade agreements, but accessing growth markets was critical for long term growth for both countries.
"We don’t appreciate the fact that the domestic market is not enough for competitiveness and productivity to take-off. We have to leverage foreign markets," Kathuria said.
Instead of hiding behind tariff and non-tariff barriers, countries should improve the ease of doing business and trade facilitation.
"We should have better domestic operating environments and that provides much more benefits in terms of competitiveness," Kasthuria said.
With trade tensions escalating between China and the US, India is likely to benefit by getting more access to Chinese markets and attract FDI, provided India puts its house in order and becomes domestically competitive.
If India is not competitive, it is unlikely to benefit from the China-US trade spat.
"Five years ago, when wages were growing across China, the question was asked whether foreign direct investments would flow to India because China was losing its competitiveness.
"Unfortunately, that was not completely realised.
"A lot of the FDI from Japan, China, Taiwan, and even Sri Lanka did came in to India, but most of the investments diverted to Cambodia, The Philippines and Vietnam. This was because we did not engage in domestic reforms," Kasthuria said. (COLOMBO, 14 September 2018)