Time to rethink export diversification – with India in mind

By Dhananath Fernando

Originally appeared on the Morning

The call to diversify Sri Lanka’s export basket is not new; it’s a conversation that has spanned decades.

For the most part, our approach has relied on supporting Small and Medium-sized Enterprises (SMEs), extending credit, and helping companies find overseas buyers – largely driven by the Export Development Board (EDB).

During the ‘Yahapalana’ Government, Sri Lanka unveiled a comprehensive National Export Strategy (NES) targeting six promising sectors:

• Information and Communication Technology (ICT) and Business Process Management (BPM)

• Wellness tourism

• Boating and shipbuilding

• Electrical and electronic components

• Processed foods and beverages

• Spices and concentrates

In addition, four cross-cutting areas were introduced to complete the export ecosystem:

• Logistics: streamline supply chains and reduce time-to-market

• National Quality Infrastructure (NQI): upgrade testing, certification, and compliance standards

• Innovation and entrepreneurship: promote R&D, tech adoption, and startup growth

• Trade information and promotion: enhance market intelligence, branding, and buyer linkages

This strategy was widely appreciated at the time. Even the EDB Chairman appointed under President Gotabaya Rajapaksa’s administration pledged to take it forward. But strategies need to evolve. And now, the context has shifted.

A case in point is how Ceylon Cold Stores (CCS) – a subsidiary of John Keells Holdings (JKH) – has taken a new route into India. Rather than exporting directly, as it unsuccessfully attempted in the past due to India’s non-tariff barriers, it has now partnered with Reliance Consumer Products. Through this partnership, CCS products will be distributed across 18,000 Indian outlets.

If the venture proves successful, we could see CCS expanding operations further, either producing in Sri Lanka for export or even setting up shop in India. This is a powerful lesson; if we are truly serious about diversifying exports, India is a market we can’t afford to ignore. But the route may not always be direct; it could mean partnerships, joint ventures, or becoming part of Indian supply chains.

And it’s not just consumer goods. While CCS is expanding into India, some Sri Lankan banks, now holding excess US Dollar reserves, are looking to partner with the Gujarat International Finance Tec-City (GIFT City).

Several bank CEOs in Sri Lanka who have already invested have stated that their goal is to support Sri Lankan companies investing in India – or even Indian companies operating here. In fact, many Sri Lankan service sector firms are already functioning in India. This is a clear signal: the momentum has shifted. The landscape is changing and we are slow to adapt.

Meanwhile, India is also reshaping the global trade map. It has already signed a Free Trade Agreement (FTA) with the UK, and is in the final stages of a similar deal with the European Union (EU). Under the UK deal, 99% of Indian exports to the UK will be tariff-free, and 90% of UK goods will get similar access to India – significant reductions even for alcohol products.

Once the EU deal is signed, exporters will have even more incentive to route products from India, especially given Sri Lanka’s uncertain GSP+ status. So, if we try to compete head-on with India in the same markets, we may be setting ourselves up for disappointment. Instead, we should look at how we can complement India – join its supply chains and offer what India alone cannot.

One such overlooked area is electricity exports. Back in 2016-’17, when the NES was developed, the potential of renewable energy in Sri Lanka was limited. Today, that picture has changed dramatically. Solar and wind investments have surged, and with the right policy push, electricity exports to India could become a serious reality.

This example illustrates a broader point: strategies must be dynamic. Markets evolve, technologies advance, and regional power equations shift.

India, for instance, is integrating rapidly with global and regional markets. Sri Lanka can ride that wave, or watch others benefit in our place. With geopolitical winds also shifting – particularly with the West looking for reliable partners in the region – India is too big to be left out of any serious trade or investment plan.

If we play our cards right, Indian growth could also drive investment into Sri Lanka, especially in sectors that support exports. But to unlock that opportunity, we need serious structural reforms:

• Industrial lands must be made available, ideally through private sector-led zones with minimal red tape and a streamlined Board of Investment

• Electricity sector reforms are non-negotiable – both to reduce domestic costs and to enable energy exports

• Trade facilitation through a modernised Customs act is essential to attract investors eyeing India via Sri Lanka

• Debt sustainability must be maintained – no investor will bet on a country flirting with default

• State-Owned Enterprises (SOEs) must be restructured to reduce the fiscal burden and unlock productivity

In short, if we are serious about export diversification, we must acknowledge that the rules of the game have changed. Old models won’t work in a new world. India is no longer just a neighbour; it is a gateway, a competitor, and a partner all at once.

The question is: will we adapt fast enough to matter?

Mapping Sri Lanka’s growth strategy

By Dhananath Fernando

Originally appeared on the Morning

With the final stage of Sri Lanka’s debt restructuring scheduled for next year, the focus must shift decisively towards economic growth. In this context, President Anura Kumara Dissanayake’s recent visit to India is particularly timely.

Over the past two years, Sri Lanka has been largely engaged in stabilisation efforts. Higher interest rates and increased taxes were central to this stabilisation agenda, which is fundamentally about avoiding bad decisions rather than actively pursuing the right ones.

Using a cricket analogy, stabilisation is like a No. 11 batsman in a Test match defending the wicket – the goal is simply to avoid getting out, not to score runs.

The next phase, however, demands a proactive growth strategy. Economic growth is less about avoiding pitfalls and more about taking the initiative and making bold moves. If stabilisation is about survival, growth is about thriving; it’s like playing a T20 match where you must play shots, protect your wicket, and actively score runs.

Connectivity represents a key area where Sri Lanka can catalyse growth. Connectivity to the Indian Ocean through maritime routes has been discussed for decades, but connectivity to India deserves equal, if not greater, attention.

India’s rapidly growing middle class presents significant economic opportunities for Sri Lanka. If we are serious about growth, enhancing connectivity with India is a necessity, not an option. Unfortunately, Sri Lanka has been slow to respond over the years. This time, we must be proactive and get the work done.

There are already Sri Lankan companies like Damro, MAS, and Brandix, as well as service-sector organisations, that have successfully expanded to India. The fear that Sri Lanka might be at a disadvantage due to its smaller market size is unfounded. In fact, the small size of our market is precisely why we need to integrate with the Indian market.

Among the proposals discussed during the President’s State visit to India, connectivity projects related to energy, transport, and trade stand out as the most crucial. These initiatives provide Sri Lanka access to a market of over one billion people.

Grid connectivity, for instance, has been a topic of discussion for decades but has yet to be realised. Such connectivity would reduce energy costs and create opportunities to export surplus energy, particularly solar power generated during the day.

With South Indian states experiencing peak energy demand during the day due to industrialisation, Sri Lanka could sell excess electricity and, conversely, purchase electricity during the evening when its own demand peaks. This business model would encourage renewable energy investments in Sri Lanka, given the potential to export to India.

Lower energy costs would benefit Sri Lankan industries, including tourism, by reducing production expenses and enhancing global competitiveness. Similarly, an underwater pipeline for petroleum products could significantly cut transportation costs by enabling direct access to South Indian refineries.

A proposed land bridge could also integrate a rail line, telecommunications cables, and grid connectivity, excluding petroleum pipelines, which are expected to connect to Trincomalee’s oil tanks. These connectivity projects will require years of development, substantial investment, and careful geopolitical considerations to avoid supply chain disruptions or tensions.

Economic connectivity with India, particularly in factor markets such as land, labour, capital, and entrepreneurship, would drastically reduce production costs and provide access to a larger market. Connecting to bigger markets is essential for economic growth, and India, as a neighbouring economic giant, offers a ready opportunity.

Concerns about independence and fears of interdependence are common among Sri Lankans, but history reveals that Sri Lanka’s culture, including Buddhism, has been profoundly influenced by India. Even today, India accounts for the largest number of tourists to Sri Lanka.

The Government of Sri Lanka must establish competitive investment policies to attract foreign investments with clear cost-benefit analyses. Reviewing joint statements from past State visits shows recurring references to connectivity projects such as the land bridge, Trincomalee oil tanks, and investments. What has been missing is the political will and proactive action to turn these plans into reality.

If Sri Lanka fails to capitalise on this opportunity for economic growth, a second default may become unavoidable, leading to yet another request for assistance from India. The stakes are too high for inaction.

Why was the IMF Tranche Delayed?

Originally appeared on The Morning

By Dhananath Fernando

There is some uncertainty in the market regarding the reasons for the delay in the IMF's second tranche. The simple reason is that although we have made some progress, given the depth of the crisis, our speed of reforms is inadequate for a swift recovery, particularly in revenue collection.

A shortfall in revenue collection, expected to be about 15% compared to initial projections by the year end, has been cited as a key reason. Secondly, until we finalize debt restructuring, especially external debt restructuring, the risk factors remain high in achieving our desired debt-to-GDP ratio. Even after the expected debt restructuring, in 10 years, our debt-to-GDP ratio will still be above 90% according to estimates.

Thirdly, the Central Bank's reserve collection has slowed down. Consequently, with our macroeconomic indicators sending mixed signals, it can not be assured that the economic recovery is still on the right path. Furthermore, at the press briefing held on the 27th of September IMF officials reiterated that more work needs to be done to sustain the reform momentum.

It is crucial to identify the reasons for the delay in reforms. Our framework for driving reforms is not well-established. The current structure, where the President acts in the capacity of the Minister of Finance, appoints committees, and delegates tasks, is flawed. Some tasks are interconnected, and the entire drive must come from the Finance Minister alone.

Further, these two roles can have contradictory interests. The Finance Minister holds an unpopular job, requiring revenue increases through taxation and expenditure reduction. Conversely, when the President, a politician expecting re-election, occupies the role, there's a natural tendency to make popular decisions, deviating from essential reforms.

Our reform process is highly complicated, demanding direct involvement of the Finance Minister in debt negotiations with external creditors in several categories, namely multilateral, bilateral, and private creditors. This task alone is equivalent to a few full-time jobs. Additionally, structural reforms are expected to focus on State-Owned Enterprises, where considerable trade union influence will come into play with appointments made by fellow cabinet ministers. Thus, driving such unpopular yet critical reforms becomes nearly impossible, especially when the finance minister is also the President or vice versa. More importantly, for key appointments such as the Central Bank Monetary Board and Governance Board, the President nominates with the Minister of Finance's approval and the Constitutional Council's endorsement. When the President and the Finance Minister are the same, the objective of checks and balances significantly diminishes.

In the case of India's reforms in the 1990s, it was Dr. Manmohan Singh who spearheaded reforms. He had Dr. Montek Singh Alhuwalia as the Chairman of the National Planning Committee to drive reforms. With his experience working with the IMF and a keen understanding of the Indian perspective, the reforms initiated in the 1990s continue to fuel India's growth, making it one of the countries with the highest economic growth rate.

The IMF Governance Diagnosis report, subsequently released, provided numerous recommendations out of which approximately 16 recommendations have been prioritized, mainly focusing on governance and transparency.

One reason this column advocates moving beyond IMF reforms is that corruption cannot be curtailed solely through governance structures. The size of the government must be limited in conjunction with effective governance structures. Aligning governance structures with the vast expanse of the government is nearly impossible.

Furthermore, the IMF primarily brings stability; the responsibility for growth lies in our hands. We must unlock our growth potential through necessary reforms, extending beyond the IMF program. This underscores the urgency of accelerating comprehensive reforms and establishing a dedicated team to drive these changes. Regrettably, what we observe is mere enactment of legislation without robust mechanisms to execute and ensure continuity of the process, and this leading to delays in the IMF's second tranche.

How should we think about the e-NIC program? Prof Mehta offers insights from India's experience

With the recent passing of regulations, the Sri Lankans government to issue new digital id cards with a central database of citizens have come under scrutiny. When Advocata hosted Indian political analyst Prof Pratap Bhanu Mehta earlier this year we asked what lessons Sri Lanka can learn from India's digital ID project Aadhar

Q: Sri Lanka is planning to introduce a digital Id called the e-nic project. In India, you have experience with the Aadhar project that’s digitized millions of identity data. What can we learn from this in Sri Lanka

A: This is something that is going to be a big challenge for the future. There is no question in terms of ease and convenience. Some form of digital ID is very attractive. There’s almost a kind of utopian romance people associate this notion of, one ID, one authentication and all services open up- you don’t need multiple cards, multiple agencies.  Certainly we want a way of redeeming the promise. You can’t roll back the tide of technology and in any case we’re doing that with private companies, Google, Facebook all the time, so why not harness for a public purpose?

I think the real danger is that these are tools of surveillance and and these are also tools of control and you need to see new, robust privacy legislations. You need a consent architecture for it- how is this information is going to be used? and what are you consenting to when you use this ID. You need an information architecture -- who is allowed to share what and with whom? Because with that digital ID, depending on how it is designed, can potentially reveal a lot of information about a person. It has to be embedded in deep institutional safeguards.

In India, the worry is that -- and most of us were moderate proponents of Aadhar -- we are rushing into the ease and convenience part, but frankly there is very little protection on privacy and almost no protection on surveillance. And as the experience of democracy is globally showing you have to safeguard against the possibility that authoritarian elements within our societies might use this information and data to control and surveil populations, and you need safeguards against that.

Prof Mehta who was an earlier a moderate proponent of Aadhar wrote a hard hitting Column on the project arguing the project has gone too far.  Sri Lanka’s e-NIC project is even more casual on concerns around privacy and transparency.

The video of the exchange is below

Expanding Trade with India : Winning with Competition or Cowering under Protection?

By Anushka Wijesinha

The article originally appeared on the Daily Mirror on April 29, 2015

In preferential trade agreements, we often see the potential losers being the most vociferous and more organized, while the gainers are quieter and more fragmented. This has been a typical characteristic of the debates on the India-Sri Lanka Free Trade Agreement (ISFTA) and the proposed Comprehensive Economic Partnership Agreement (CEPA) as well. But Sri Lanka must be careful of letting one side be heard more – by the public as well as by policymakers – than the other. More eclectic and informed debate representing all sides is essential, which is why I look forward to moderating this afternoon’s National Chamber forum on ‘CEPA and Its Implications for the Sri Lankan Economy’ – the first by the private sector following Indian PM Modi’s visit and announcements by both him and the new Sri Lankan government that they would forge ahead with the deal.

Deeper Engagement

The proposed CEPA would expand the current ISFTA to cover services, investment, and economic cooperation. The agreement was to take in to account the massive asymmetry between the two countries (economic size, population, etc.), afford Sri Lanka a more than disproportionate advantage, and allow for partially or fully restricting sectors it didn’t wish to open up right away. Following aggressive lobbying by narrow nationalist business leaders with close political affiliations, there was an eruption of uninformed and exaggerated sentiments against promoting greater commerce with India over the past few years. These groups successfully scuttled efforts at completing the CEPA deal several times in the past. “CEPA” became such a taboo word that the India-Sri Lanka Joint Statement in January 2013 avoided using that terminology, and referred to a “special economic partnership framework” instead!

Problem with Protectionism

It is not surprising that protectionist trade lobbies have emerged so influential. Sri Lanka has been sliding backwards in its openness to the world. For around 10-15 years now, protectionism has been on the rise and there has been a creeping up of applied tariffs and para-tariffs. A tangle of para-tariffs has now effectively doubled nominal protection rates to over 20%. Simultaneously, successive Budgets have introduced a range of ad hoc, special protection and promotion schemes for various domestic industries and indigenous enterprise. While this is not an unprecedented industrial policy approach, it does serve to weaken competitiveness of Sri Lankan firms. I recall a conversation with a business school friend of mine who started a high value added spice export operation out of Sri Lanka some years back. He lamented about the severe protectionist behaviour from local spice industrialists even though the project had been given the green light by the necessary authorities. Economic theory and evidence amply proves that in the presence of protection and in the absence of competition, firms become more complacent, less innovative and dynamic, and less able to face international markets. Is this what has happened to Sri Lankan firms vehemently against expanding trade ties with India? Ill-prepared for competition, cushioned by industrial policy that afforded special comforts?

 Government Must Play Smarter Role

It is incumbent on the government to ensure that stakeholder concerns are heard and addressed; that as much transparency as possible is maintained (without of course compromising the country’s negotiation position), and information is shared more comprehensively and consistently so as to prevent groups with narrow vested interests being able to misinform an mislead. Most importantly, the government cannot let the agenda be highjacked and held hostage by narrow interests groups, like in the past. A bilateral trade or economic partnership agreement that Sri Lanka enters in to affects not just a handful of firms and their employees but hundreds of other firms, hundreds of thousands of employees, and millions of consumers in Sri Lanka. The government must provide a clear policy direction on its economic engagement with India, making a strong departure from the ambiguous statements of the past – i.e., calling for a ‘special economic partnership agreement’. Meanwhile, although I did acknowledge at the start that the gainers from freer trade are often fragmented, less organized and less vociferous, it’s time that changed. Consumer and producer groups that gain from freer trade must speak up.

Opportunity to Win Big or Cower Down

Whether its called a CEPA or any other variation of it, the fact remains clear – it is in Sri Lanka’s interests to deepen economic ties with India. An agreement must be forged that cleverly expands Sri Lanka’s economic interests – those of our firms and our consumers; not a narrow few of them, but the wider many. To those who claim that it threatens our national interest, we must remind them that expanding our trade interests for the benefit of the many is also a part of our national interest. Just the opportunity to tap in to India’s growing middle class alone, set to be over 250 million this year – 20 times our entire domestic market – can be transformative. There are Sri Lankan firms with quality products that can and must break in to India. There are service providers, including dynamic Sri Lankan start-ups like Trekurious – a provider of unique lifestyle experiences – that have already entered India and demonstrated early success. A bilateral agreement will ensure that the systems are set out, for companies like these to operate in a rules-based environment. And if it is that we feel Sri Lankan firms cannot face competition, and it is for that reason alone we should not go for deeper economic engagement, then I’m afraid we have bigger things to worry about than a four-letter word starting with C.

---

Anushka Wijesinha is a development economist and a consultant to a host of governmental and non-governmental organizations in Sri Lanka.  He has previously worked at Institute for Policy Studies, The World Bank and the presidential commision on taxation.  His writings on economics are found on his blog -- The curionomist.  You can follow him on Twitter @anushwij