A brief by the Asian Development Bank highlights a significant gap in Sri Lanka’s trade engagement with India, identifying $808 million in unrealised export potential in the Indian market.
Despite India being a major trading partner, Sri Lanka’s export growth has remained modest, with limited diversification beyond traditional sectors such as tea, rubber, and textiles. The report attributes this underperformance to structural barriers within the Indo–Sri Lanka Free Trade Agreement (ISFTA), including restrictive rules of origin and the continued use of para-tariffs, which reduce price competitiveness.
To address these constraints, the ADB recommends expanding the ISFTA beyond goods to include services and investment, alongside trade facilitation reforms such as a National Single Window system. The report also highlights the potential for deeper integration with industrial clusters in southern India, particularly Tamil Nadu, to link Sri Lankan firms into regional and global value chains..
Key Trade and Reform Metrics
Unrealised Potential: $808 million in "missing" exports to India out of a total $6 billion global gap.
Narrow Export Basket: Textiles, tea, and rubber still account for two-thirds of Sri Lanka’s merchandise exports.
Growth Disparity: While India’s economy surged by 7.8% (2022–2024), Sri Lankan export growth remains stagnant.
Policy Roadblocks: Strict rules of origin, technical barriers to trade, and non-transparent para-tariffs are stifling bilateral flow.
Proposed Sector Focus: High potential identified in jewelry, spices, high-end apparel, and IT services.
Strategic Integration: Focus on the industrial clusters of Tamil Nadu to bring Sri Lankan firms into global value chains.
What are "Para-tariffs"?
Para-tariffs are additional taxes or fees imposed on imported goods that are on top of the standard customs duty. While they often appear under different names, ike "administrative fees" or "port development levies", their combined effect is to significantly increase the final price of an imported product.
For the ADB, para-tariffs are a primary barrier because they lack transparency and often wipe out the price advantage that a Free Trade Agreement is supposed to provide. Removing them is considered the first step toward making Sri Lankan products competitive in the Indian market.
Policy Relevance
Mitigates Macroeconomic Vulnerability: Diversifying exports to India reduces Sri Lanka’s reliance on volatile Western markets and traditional commodities like tea.
Leverages India’s "Global Value Chain" Integration: As India becomes a global manufacturing hub, Sri Lanka can provide critical inputs, particularly in the apparel and logistics sectors.
Promotes Services Trade: Expanding the ISFTA to include IT, tourism, and logistics reflects the modern reality of both economies, where services contribute the lion's share of GDP.
Enhances Regional Logistics: Utilizing the Port of Colombo as a deep-sea gateway for Indian cargo strengthens the "neighbor-first" economic policy of both nations.
Follow the Full Note Here: ADB: Unlocking Sri Lanka’s Trade Potential with India