Sri Lanka should be the Hong Kong of India Posted on September 5th, 2015

Chanaka Bandarage

No one would disagree that Hong Kong rode to its prosperity on the back of China (after the Chinese Revolution, Hong Kong underwent a rapid and successful process of industrialization, from the late 1940s, and became a rich nation).

After the liberalisation of China’s trade (Chairman Deng’s Open Door Policy’ in the late 1970s), Hong Kong grabbed the opportunity and increased its trade with China by tenfold.  Within few years, the tiny Hong Kong’s exports to China surpassed its imports from China.

When it comes to India, Sri Lanka is today placed in a similar position as that of Hong Kong.

India is a significant global player and it is estimated that economically it may surpass China (given China’s fast ageing population and the gender imbalance), and it has the ability to become the world’s biggest economy.

Unlike how Hong Kong prospered thanks to China (Hong Kong is located in very close proximity to China); Sri Lanka (located in very close proximity to India), has thus far been unable to grab the opportunity and capitalise on India’s growth.

India had closer to a double digit GDP growth in the past decade, but, as stated before, Sri Lanka failed to capitalise on this.

In the past ten years Sri Lanka ‘put all its eggs only in the China basket’.  After the war, it sadly developed a relationship of mistrust and annoyance with India (true, Thamilnadu created the problem, but, Sri Lanka diplomatically failed to secure New Delhi’s support).

Sri Lanka failed to relaise that it cannot rise to prosperity solely on the back of China, but, it could comfortably do so on the back of India.

Indeed, China is an excellent friend for Sri Lanka. This has been the case historically. Sri Lanka should be ever grateful for China’s help afforded to Sri Lanka during many difficult times. But, China is too far away from Sri Lanka and it is very ‘different’ than that of Sri Lanka.  On the other hand, Sri Lanka and India are very similar when it comes to many things such as the culture, food, attire, language (English is well spoken in both countries; also, Sinhala (a Sanskrit) and Tamil, an Indian language), sports, religion, values and traditions and physical characteristics of the people.  The fact that Sri Lanka’s first King (Prince Vijaya) was an Indian (from Bengal) and that Sri Lanka’s third King, Panduwasdewa, was married to a blood relative of Lord Buddha (Princess Bhaddha Kachchayana of the ‘Shakya Wangsha’), are notable and significant features of the relationship.

Furthermore, Sri Lanka and India are separated only by a short stretch of the sea and apart from the examples in the preceding paragraph, excellent, brotherly relations have existed between the two nations from time immemorial (of course, despite animosities between Sri Lanka and Thamilnadu).  India as a nation has never invaded Sri Lanka in a war like manner.  Sri Lanka’s Anagarika Dharmapala was a person who recently brought the two countries closer.  Another was Mrs Sirimavo Bandaranaike.

In the past decade, India’s exports to Sri Lanka almost doubled, Sri Lanka failed to keep pace with the growth of its exports to India.

The recent Sri Lankan governments (in the past 20 years), rather than building a manufacturing and productivity based economy, focussed on a service based economy (it was the ‘easy way out’).  Thus, such unproductive and non-manufacturing ventures like communication centres, beauty palours, trishaw taxis (there are over one million of them in the country), importation and distribution of illicit drugs such as heroin and ecstasy, betting centres, lottery sales centres, small-scale casinos, massage parlours in the guise of Ayurveda centres, private tuition centres (even Sinhala, Buddhism and History are taught for school children in these centres), variety of international schools and tourism based industries (the latter is somewhat good) mushroomed in the country.  They became the wholemark of the country’s economy.  These ventures, though created jobs, generated no or less GDP for the economy.  The governments by trying to reduce the country’s unemployment, gave jobs as public servants to thousands of people who supported them politically during elections (these were not merit based appointments, hence the lethargic and corrupt public service that we have today).

The governments not knowing how to create employment for its citizens (both skilled and unskilled workers) encouraged them to leave the country in search of the ‘greener pastures’.  Lots of women ended up working as domestic maids in Middle Eastern countries (stories have emerged that some of them have been treated like slaves) and lots of men were found jobs in South Korea. The governments were unconcerned in paying attention to the adverse socio, cultural and psychological effects of the family members that were left in the country, caused as a result of the mass migration of people to overseas countries.  Drastic stories have emerged about the plight of children and elderly who were left in their respective homes helpless.  The governments liked the idea that its citizens left its shores as their remittance became the biggest source of revenue for them.  The rulers plundered and mismanaged the public wealth from the left, right and the centre.

The governments borrowed heavily, especially in the past 10 years, the injection of such monies to the economy created somewhat an artificial growth in the GDP (of 6%).  Today, Sri Lanka is a hugely debt ridden country, its foreign debt alone has exceeded US$25 billion (?), which is far too much for a country of the size of Sri Lanka.  The country owes money to other sources too, including local banks and various employee trust funds.

Unlike in the 1960s and 70s, where governments helped to build a strong manufacturing/productivity base economy, in the last 35+ years, large numbers of small factories, textile mills and small businesses were compelled to be closed down.  Local businesses were unable to compete with the influx of cheap Chinese, Taiwanese and Indian exports to the country.  Like few third world countries have done in the past 20 years, Sri Lanka failed to become a newly developed country (apart from corruption, mismanagement and maladministration, the effects of the war was a major impediment for the country’s development).

Today in Sri Lanka, almost everything is imported, including the country’s main staple diet, rice.  Basically Sri Lanka today has very few items available to export to India (or to any other any country); except things like fish harvested from the sea, some agricultural/horticultural products and a few value added items imported from other countries for the sole purpose of re-export.  The irony is that this is a country that once produced fine electrical and electronic items, textiles, furniture, handicraft, confectionaries, tyres, bicycles, batteries, razor blades, perfumes and even motor cars.

During 2011/12, India’s exports to Sri Lanka amounted to $4.3 billion, Sri Lanka’s exports to India during the same period amounted to only $721 million.   The total bilateral trade is earmarked to reach $10 billion in the near future; the trade balance will continue to be very much in favour of India.

Since of late, India has been pressurising Sri Lanka to sign CEPA – ‘Comprehensive Economic Partnership Agreement’.  No doubt that such an agreement would provide Sri Lanka preferential access to the very large Indian market, but due to CEPA, the country could be flooded with cheap Indian exports.  They can destroy the country’s remaining, very small scale production/manufacturing based economy.  The writer does not say that Sri Lanka should flatly say ‘no’ to CEPA, he states Sri Lanka should use CEPA as a bargaining tool to obtain more favourable trade advantages from India.  For example, Sri Lanka should ask India to rectify the anomalies (several) in the Free Trade Agreement (FTA) that both countries signed in 1998.  Sri Lanka should demand that it should be given export access to the entire Indian market, with zero tariffs (1.2 billion people!).  If the latter could be achieved (a difficult task, but a possibility), Sri Lanka should be able to sign CEPA.

Furthermore, prior to signing CEPA, Sri Lanka should implement adequate measures to protect its local industries from the possible massive scale intrusion of Indian products into the country.  An intelligent and a tactful Sri Lankan leadership should be able to successfully achieve this.

This is the time for Sri Lanka to negotiate with India on trade and obtain the best economic outcome for itself. Sri Lanka should seriously ask India to stop poaching on her waters which causes US$1 billion loss to Sri Lanka per year (this could be a pre-condition to signing CEPA).

If Sri Lanka foolishly enters into trade agreements, international contracts etc with overseas countries (including that of India), without obtaining competent legal counsel (some of the past foolish examples are the Hedging deal, Air Lanka agreement, Cairns oil contract, Shell gas deal, IOC deal etc), it is the innocent public who will pay the ultimate price for the huge misdeeds of the politicians.  The few examples cited herein brought forth billions of dollars of losses to Sri Lanka.

Now that Sri Lanka has a new government and India’s Mr Modi has extended the true hand of friendship to Sri Lanka, if wise and intelligent, this is the opportunity for Sri Lanka to grab and try to become the ‘Hong Kong of India’ (note the remarkable turnaround in the relationship between the two nations – in 2013 India even boycotted CHOGM; the year prior to that it co-sponsored a resolution against Sri Lanka at the UNHRC in Geneva).

If Sri Lanka (still, very much a third world country), wants to become rich capitalising on India’s massive economic growth (the Indian middle class alone is more than 250 million, by 2025, this number is likely to increase to 550 million); it should evaluate (before signing CEPA) what goods it could and should produce for the Indian market.  For example, if properly planned, Sri Lanka can be a large scale food and agro business supplier for India (notably, things like tea, spices, fresh fruits, vegetables and flowers (true, India is the world’s largest tea producer, but, there is a scarcity of tea in India, and there is the tremendous potential to introduce ‘Ceylon Tea’ (the world’s finest) in India, in a very big scale).

If Sri Lanka is to sign CEPA, Sri Lanka should ask as a precondition that India should assist Sri Lanka to become the logistic hub to various production chains in India.  Few industry examples that come to the writer’s mind are automobile and IT components, manufacturing of pharmaceutical products, electrical machinery and parts and food processing products.

In this regard, the new Sri Lankan government must work hard in creating these opportunities for Sri Lankan companies.  Creating new economic zones solely for the purpose of manufacturing products for India is a good idea.  Since land is in scarcity in most parts of Sri Lanka and they being closely located to India, such economic zones can be established (with Indian aid) in the North, South and East of Sri Lanka (for example, in Kilinochchi, Hambanthota port area and Trincomalee respectively), but, all Sri Lankans should be able to work in those ventures.

India has agreed to spend money on Sri Lanka’s Railway projects, massive scale housing developments in the North and the Sampur Power plant project.  It has offered millions of dollars as lines of credit to Sri Lanka, also a massive currency swap agreement that is currently in place. Sri Lanka should accept these gifts with gratitude.  This is in addition to the US$5 billion (or more) that India’s private sector is earmarked to invest in Sri Lanka in the coming years. India is Sri Lanka’s largest source of foreign tourists.

But, it is still too early for Sri Lanka to say ‘yes’ to the rail and road link that India wants to build at its own cost (an ADB loan project) over the Palk Strait from Dhanushkodi to Talaimannar.  Naturally, due to Thamilnadu hostility, the people in Sri Lanka has a strong reservation about this proposed mega-project; despite the fact that it could bring huge and unprecedented level of economic benefits to Sri Lanka, including a tenfold increase in tourist numbers, especially thousands of new European and US tourists that will travel from India to Sri Lanka by rail or road.  It is up to the new Sri Lankan government to convince its people as to why this new rail/road bridge is necessary and that it is not harmful to Sri Lanka’s sovereignty and territorial integrity.  For this, the new government will have a lot of explaining to do to its people.