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Potential Economic impact of India-Sri Lanka bilateral trade liberalization

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  • Sikdar, Chandrima

Abstract

India and Sri Lanka accounts for the largest bilateral trade flow in the SAARC region. The Free Trade in Goods Agreement (ISFTA) between the countries which was operationalized in March 2000 accelerated the bilateral trade flows and India is now Sri Lanka’s largest importer and among the top five destinations for Sri Lankan exports. The countries have now moved towards negotiations on Comprehensive Economic Partnership Agreement (CEPA) with the aim of providing additional market access to each other. Against this backdrop, the present paper attempts to study the likely impact of this bilateral trade liberalization. Using the GTAP 7 database the study conducts simulation involving the scenario of the bilateral trade liberalization between India and Sri Lanka and assesses the potential economic impact of this liberalization on the economies. The paper also incorporates features of imperfect competition and scale economies for select manufacturing sectors in India and seeks to understand the welfare implications of the same. A large number of Indian exporters also use the duty drawback scheme extensively to import various inputs at world prices from Sri Lanka. The present paper uses the GTAP-DD model to study the implications of this feature of India-Sri Lanka bilateral. The simulation results show that post the FTA there is a significant increase in the volume of bilateral trade flows. Both countries gain but India’s gains are relatively small. However, gains accruing to India improve when scale economies prevailing in some Indian industries are taken into account. Welfare position is almost reversed when duty drawback in some of Indian sectors are factored in. India gains more than Sri Lanka. Thus, greater market access into India through the preferential route seems to be a more profitable proposition for Sri Lanka.

Suggested Citation

  • Sikdar, Chandrima, 2011. "Potential Economic impact of India-Sri Lanka bilateral trade liberalization," Conference papers 332075, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332075
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