Get away from frivolous matters
“Was Kamala Harris’ grandfather a Sri Lankan?” That’s one of the key items trending on Sri Lankan social media these days. Not just among teenagers, but among educated Sri Lankans. Sri Lankans love to digress from reality and venture into a fantasy world. Right now, too many educated Sri Lankans are wasting time on an extraordinarily frivolous aspect of an election in a country half a world away. Meanwhile, we ignore what’s happening just next door, where a key election just took place in the north-eastern Indian state of Bihar, which has an important bearing on the Government of Prime Minister Narendra Modi. We also virtually ignore events taking place in Asian countries that have far more influence on Sri Lanka’s present and future – anti-monarchy protests in Thailand; crackdown on democracy in Hong Kong; the naming of the new crown prince in Japan; political upheavals in Pakistan…What matters most is the impact to Sri Lanka on trade, raw materials, markets, investment, and yes – borrowings. In part two of this series, we look at some of the key aspects of our economic reality vis-a-vis our business world. Part one was published last week. India and China
A key area that Sri Lankans lack in-depth knowledge is the economics of India and China individually, and the economic relationship between India and China. We tend to oversimplify some things and believe that our island needs to choose between India and China, when we don’t need to. India is the huge market and source of raw materials next door. China is already a global power. Together, the two powers are leading Asia’s rise. In actual fact, these two giants are intertwined economically and share a close economic relationship, although their political relations are often rather rocky due to decades-old border disputes.
India-China Trade
Today, China's trade balance with India has a surplus of almost $ 60 billion. However, they are not well established in their bilateral negotiating process to tackle the Indian trade deficit. In India and China, the shift in trade that would protect future economic relations between the two countries, but would allow India to reduce its deficits, was constantly discussed.
China FDI (India)
China's foreign direct investment into India has increased and is aimed at the metallurgical, renewable (solar) and electrical, and automotive and chemical industries as shown in Fig. 1.
In the last few years, India and China have become more integrated. For example, Chinese funding has penetrated India's technology market, pumping into India's start-ups, including Zomato, PayTm, Big Basket, and Ola in trillions of US dollars; a think tank based in Mumbai, which has profoundly integrated China's giants into India's socioeconomic and technological ecosystem.
The recent clashes on the India-China border raised fears of a greater war. But this was an exaggerated fear. Both countries have leaderships that are far too mature to risk any type of major war, as both recognise the futility and unnecessariness of such conflagration. Both countries now are faced with difficulties to escape their respective nationalistic sentiments, and de-escalating the situation will take a little time. More specifically, how every side replenishes the long-term relationship between countries as strategic competitors is what matters. Of the two, India faces more challenges: Prime Minister Modi, as part of a more general shift to self-sufficiency and protectionism with restricted military options, faces increasing pressure to boycott Chinese goods; a policy that is precisely the right way to counter China's long-term danger.
India and US
India can increase its trade footprint through the US-China trade dispute, especially in the categories for which tariffs are placed on China by the US. Trade disputes between Washington and Beijing have resulted in some producers pulling out of China, preventing higher tariffs. Consequently, the countries of Southeast Asia such as Vietnam were widely touted as trade winners. India may also be a beneficiary.
US restrictions on imports of textiles from China's Xinjiang Autonomous Region can also benefit Indian textile exporters. On 14 September, because of concerns about abusive, illegal forced labour in the area, these restrictions were imposed. With Xinjiang representing approximately 80-85% of the cotton production in China, India has substantial benefit from foreign buyers trying to diversify their supply base away from China.
Yet with rising global anti-China feelings, India can potentially benefit from these wider geopolitical changes by implementing comprehensive structural reforms to improve its global trade ties.
The Indian pharmaceutical industry in volume ranks 14th, and by value is the third-largest in the world. In 2018-19, the country exported drugs worth $ 14 billion to the U.S.
In order to discourage purchases of Chinese products, the Indian policymakers have also directed e-commerce giants, including Amazon and Walmart's Flipkart, to show the country of origin on products. Clearing products imported via Alibaba and Tencent have also been delayed.
In the first half of 2019, Indian trade diversion effects of Washington's tariff war with China, as per a United Nations trade and investment report, gained approximately $ 755 million in additional exports, primarily of chemical goods, metals, and ore.
Sri Lanka’s debt
Before we start negotiating with countries, we need to understand how much we owe them, and what type of debt that is, as shown in Fig. 2.
Since 2015, almost all Chinese loans were project loans, the major portion being obtained for heavy-infrastructure construction projects through the Chinese Export-Import (EXIM) Bank. These include the port of Hambantota, the Colombo-Katunayake highway, and the airport of Mattala. The country was not allowed to use the funds raised from these project loans for further purposes.
The Government is not really independent financially in relation to the project loans (or any project loans from the World Bank, the Asian Development Bank, or the Japan International Co-operation Agency). Therefore, these loans provide little assistance in solving BOP (Balance of Payment) crises, which were an ongoing problem in Sri Lanka.
A special aspect of the Foreign Currency Term Financing Facility (FTFF) is that the loan is not attached to a project, and so the Government of Sri Lanka has the freedom to use the loan money at its discretion.
Sri Lanka and the US
The Trade and Investment Framework Agreement (TIFA), signed by the US and Sri Lanka in Washington D.C. on 25 July 2002, offers a forum suitable for both governments to engage in dialogue more closely on many areas of mutual interest. Fig. 3 shows Sri Lanka’s trade with the US.
Sri Lanka and India
In terms of bilateral trade, imports from India have increased with the signing of the FTA between the two countries in 1998. Exports to Sri Lanka from India have risen from $ 600 million in 2001 to $ 4,495 million in 2018. Sri Lanka's exports from the current $ 712 million are potentially significantly increased and bilateral trade expansion is possible through facilitatory steps and optimal utilisation of the two countries' agreement.
Between 2000-01 and 2018-19, bilateral trade between India and Sri Lanka grew about nine times. Out of which, India's exports to Sri Lanka amounted to $ 4.7 billion and imports amounted to $ 1.5 billion; the overall trade between these two countries totalled $ 6.2 billion in 2018-19.
In 2018-19, India's top three HS-2 classifications exports to Sri Lanka comprised 43% of total exports which include mineral fuels, ships which boats, and vehicles. The top three imports in India included boats and ships, food-producing residues and waste, and 56% of total imports including coffee, tea, and spices.
India's Sri Lankan exports lose their competitiveness to China's Sri Lankan exports. It is expected that China would eventually overtake India, especially for imports, as Sri Lanka's biggest trading partner. India 's commercial challenge today is primarily systemic. While tariff concessions, tax incentives, and schemes can help boost exports, an effective measure would be to recognise and make competitive sectors in which India offers a comparative advantage on the Sri Lankan market. The research indicates export potential for machinery, mechanical equipment and components, textiles, automobiles, aeroplane, vessels, and base metals as well as for their goods. The findings of our study indicate that the export potential exists. Furthermore, Indian export ability is potentially enhanced in the ship, boat, and floating market.
Sri Lanka and China
China became the biggest source of imports in Sri Lanka in 2016, outperforming India. The prices of Indian imports, however, surpassed marginally Chinese imports in the following years. In addition to the noticeable increase in Chinese investments in Sri Lanka, India obviously wouldn't like this scenario particularly well when China can export to Sri Lanka more than India. Fig. 4 provides more information on this.
Over the past five years, almost 30% of Chinese imports to Sri Lanka have been electronic products. A large number of raw materials – such as fabric and cotton – used in Sri Lanka’s garment industry are also imported from China.
Economic nationalism
Firstly, we need to recognise that our ignorance of global economic realities has been exploited by the world’s great powers, without exception, and will continue unless we put a stop to it by educating ourselves. It started with the Portuguese, then the Dutch, French, and British, and continued after Independence.
The lesson here is that economics and global relationships should not be left to ignorant politicians, unscrupulous businessmen, or even foreign service professionals. Sri Lanka needs to form a proper think tank of our own international businessmen and women, together with academics who understand global economics and power politics.
But what is most important is that the decisions and advice of such a think tank should be followed. It should not be a case of some representative of a foreign government or foreign company exploiting our corrupt political system and ignorant officials to take advantage for themselves and the countries or companies that they represent.
Only then can Sri Lanka deal with other nations from a position of strength, where we know who we are, who other nations are, what they want, what we want, and what we can get from them in terms of business.
An important prerequisite of this is that we also need to get our country’s economic house in order. We need to appear strong and believe that we are strong in order to gain respect, instead of asking for pity and being dealt with through derision. We’d like to describe this as “economic nationalism”.
Conclusion
Sri Lanka needs to rise above unnecessary emotional sentiments with regard to global politics, and always be aware of what would be good for our own country. Above all, we need to remember that as a small economy, we need all of these major powers – China as a source of raw materials and investment; India as the huge trading partner next door; and the US as a major market.
(The writers are Managing Partners of Cogitaro.com, a consultancy that finds practical solutions for challenges facing society and different industries. Dr. Dias is a digital architect and educationist based in Kuala Lumpur. He holds a BSc in Computing from the University of Greenwich, a Master’s in Computer Software Engineering from Staffordshire University, and a PhD from the University of Malaya. He is completing a second doctorate in Business Administration from Universiti Utara Malaysia [ruwan@cogitaro.com]. Eliatamby is a lecturer in marketing, human resources, and mass communications based in Colombo. He is an author and was formerly associate editor of a newspaper and editor of various industry magazines. He holds an MBA from London Metropolitan University and an LLM from Cardiff Metropolitan University [niresh@cogitaro.com])