Read full paper: https://drive.google.com/file/d/0B-5I1TzwvAHOdURaNEhIdzEwdDBpUTNyWm5IN01MTmFsbXZj/view?usp=sharing T L Gunaruwan Department of Economics, University of Colombo, Sri Lanka. K A Inoka de Alwis Department of Economics, University of Colombo, Sri Lanka. CONCLUSIONS The results of the present analysis do not bring sufficient evidence to conclude that the ISFTA has been “effective” in promoting Indian exports to Sri Lanka or Sri Lankan exports to India, over and above any evolution of trade driven by the relative export competitiveness of the respective supplier country vis-a-vis different characteristics of the destination markets. At a Sri Lankan view point also the ISFTA cannot be considered as having produced significant benefits. Sri Lankan exports to India have been lagging behind except some potential shown in the ISFTA-Neutral category (though the positive ISFTA concessions were in the Favoured category) while Indian exports have increasingly and significantly penetrated into the Sri Lankan economy (in both the ISFTA-Favoured” and the “ISFTA-Neutral” categories). This puts in question the “advantage” of such a Free Trade Agreement. Any structural, factor endowment driven or policy oriented causes of this less than satisfactory performance need careful and strategic address prior to considering any further deepening of bilateral trade facilitation. Such assessment would also provide useful insight when negotiating free trade agreements with other countries. If ventured into, the reasons behind such an outcome could possibly be found multi-faceted. Firstly, it could well be possible that each country had taken much care to avoid risk of their own production base being opened for competition, and thereby the “ISFTA-Favoured” list being made “difficult to exploit” right from its conception. India having offered concessions for products such as machinery and vehicles in which Sri Lanka does not have an export potential, while categorising the items such as apparel, rubber and coconut based products, in which Sri Lanka has the greatest competitive advantage for exports in India’s Negative List of the Agreement, could constitute examples. Secondly, the will to make use of the ISFTA as a vehicle to get the other’s market open as much as possible, while trying to protect their own market, and the lack of genuine interest in promoting bilateral trade, could also have made the ISFTA “handicapped”. Indian intervention to “correct” their domestic tariff structure nullifying the advantage Indian investors in Vanaspathi and Copper industry gained as a result of ISFTA concessions to manufacture on Sri Lankan soil and to export to India could mirror this attitude, even though such an intervention while foregoing tax revenue to the public coffers could be rational (in view of arresting both loss of local value added and increased imports) from an Indian view point. Next, the lack of awareness among the stake-holders regarding the terms of the Agreement and the areas favoured by it, as well as regarding the benefits it offers, also could have been behind this apparent “ineffectiveness”. The under-utilisation of the ISFTA by Sri Lankan traders could have been caused by this inadequate awareness. It is important to explore ways and means of addressing these issues. First of all, bilateral negotiations should be used as a vehicle to establish trust, and also to iron out any “policy-based” imbalances which are perceived as unfavourable. The non-tariff barriers and restrictions18, for example, which could have been major constrains for exports from Sri Lanka to India, could possibly be resolved through inter-governmental discussions (removal, since of late, of port restrictions may be an example). A mechanism should be introduced to report and channel to the attention of policy makers any issues which are hitherto unknown to the relevant Governmental authorities. Next, the problem of inadequacy of awareness could be addressed by developing a network of information flows and a series of awareness campaigns, including seminars and workshops conducted for the current as well as potential exporters to India. In a Sri Lankan view point, the fact that the capital and intermediate inputs could be sourced at competitive prices from India due to ISFTA concessions could be made known to the Sri Lankan industrialists who could make use of such avenue to enhance the global competitiveness of their finished products. Similarly, the possibility of penetrating into the Indian manufacturing value chain could be pursued. Semi-processed items, such as components for the manufacture of vehicles and machinery, which could be exported duty free under the ISFTA (Abeyratne: 2013), could be supplied to the Indian product chain. Foreign Direct Investment to Sri Lanka from third countries also could be sought in the sectors possessing an export potential to India, making use of the window of opportunity offered by the ISFTA. Such strategies could help Sri Lanka benefit from technical transfer as well. The results of the research also enable inference that the Sri Lankan economic growth process in general has become increasingly import intensive, much more than becoming export generating. This invites attention of the Sri Lankan policy makers as this general trend of worsening “terms-of-trade imbalance” would mean further import dependence when the economy seeks accelerated growth, resulting in medium-term balance of payment and external financial implications on the country’s economy. It can therefore be concluded that there is an urgent necessity to enhance the economy’s overall "competitiveness” with policy priority, so that both import substitution and export promotion objectives would be supported, regardless of any bilateral concessionary trade agreements.