The Synthetic & Rayon Textiles Export Promotion Council

MARKET WATCH 03RD MAY 2021

NATIONAL

INTERNATIONAL

India's April exports up 197% on low base; trade deficit widens to $15.2 bn

India’s merchandise exports nearly trebled in April to $30.21 billion over the same period year, mainly due to low-base effect, as Covid-19 induced nationwide lockdown a year ago had temporarily stopped economic activity.

However, exports grew 16.03 per cent from $26.04 billion in April 2019, indicating that a low base was also supported by strong demand in the first month of the current fiscal. An uptick in outbound shipments in April was driven by demand for petroleum products, engineering and gems and jewellery products. Latest data also indicates that an unprecedented surge in covid-19 cases as well as localised lockdowns in the country did not affect the demand for goods. On a sequential basis, exports dipped by 12.3 per cent from $34.45 billion in March.

Preliminary data from the Ministry of Commerce and Industry on Sunday put India’s merchandise imports in April at $45.45 billion, up 165.99 per cent YoY. Inbound shipments rose 7.22 per cent from $42.39 billion in April 2019. This resulted in a trade deficit of $15.24 billion, up 120.34 per cent YoY. The deficit was $16.30 billion in April 2019.

Rise in inbound shipments was mainly on the back of higher import of gold, petroleum products and electronic goods, data showed.

“The impressive growth reiterates our assessment that the order booking position of our exporters is extremely good and with gradual improvement of the situation in the country, will push exports growth further,” Sharad Kumar Saraf, President, Federation of Indian Export Organisations (FIEO). He said that over 15 per cent growth on the base of April 2019 is a better indicator and reflects a positive double digit trend.

However, rising imports and a widening trade deficit is also a matter of concern and should be looked into, Saraf added.

In April, the value of non-petroleum exports was $26.85 billion, up 200.62 per cent on year and up 19.44 per cent as compared to April 2019. The value of non-petroleum and non-gems and jewellery exports $23.51 billion, up 164.28 per cent and up 19.89 per cent from in April 2019. Oil imports were $10.8 billion, up 132.26 per cent YoY. However, it contracted 6.62 per cent from April 2019.

"The recent surge in Covid-19 cases has posed risks to the growth but we remain hopeful of continued recovery during the year. The WTO has also revised its projection upward and expects the global trade volume to increase by 8% in 2021,” Engineering and Export Promotion Council of India (EEPC) Chairman Mahesh Desai said.

Desai further said that localised lockdowns and night curfews announced by various state governments to contain a second wave of pandemic could cause shortage of workers and logistical issues. However, this could be a short-term problem, Desai added.

Source: The Business Standard

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Ludhiana’s hosiery, textile industry go on 3-day self-imposed lockdown

Keeping in view the rising Covid-19 cases, the hosiery and textile industry on Sunday announced that they will be observing a voluntary lockdown from Monday to Wednesday this week and from Saturday to Wednesday next week onwards.

Darshan Dawar, president, Knitwear Club, said, “The hosiery and textile industry has decided to go on a voluntary lockdown from Monday to Wednesday this week and from Saturday to Wednesday next week onwards. It is our contribution to stop the spread of coronavirus in the city.”

Bahadurke Textile and Knitwear Association president Tarun Jain Bawa said that the situation is worsening day by day and it can be controlled by imposing a lockdown in the city. The government should impose a complete lockdown and should not allow any industry and shop to operate for at least seven days. This would bring down the number of cases and the government would get time for the preparation to fight against Covid., he added.

The associations said that they would also discharge their social duty and would take care of their workers and their families.

Vipan Vinayak, president of Knit and Fab Hosiery Association, said that at least 38 associations had decided to observe a voluntary lockdown.

Industrial associations demand imposition of complete lockdown

As Covid deaths are rising exponentially, the demand for imposing a lockdown in the city is getting louder. The death of Dinesh Lakra, 56, a city-based industrialist and vice-president of Laghu Udyog Bharati and member of the governing body of Employees State Insurance Corporation (ESIC), who had succumbed to Covid-19 on April 30, triggered panic among the industrialists.

This is the first time that the industry and traders are asking the government to impose a lockdown.

Darshan Dawar said that they had demanded a complete lockdown for at least one week in the city to control the spread of the virus. The representatives of the association also met cabinet minister Bharat Bhushan Ashu to discuss the same.

He added that if needed the government should extend the lockdown for another week.

“We have sent at least 10 letters to chief minister Captain Amrinder Singh and Prime Minister Narendra Modi asking for a complete lockdown in Punjab or at least in the city as Ludhiana has the maximum number of Covid cases and deaths in the state,” said Badish Jindal, president of Federation of Punjab Small Industries Association.

“The city hospitals are already struggling to meet the need for oxygen and beds. The lockdown will break the chain of Covid infection,” he added.

Gurmeet Kular, president of the Federation of Industrial and Commercial Organisation, claimed that they were the first to request the government to impose a complete lockdown in the city.

Source: The Hindustan Times

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Govt waives late fee for delayed filing of March, April GSTR-3B, tax payment

The government has waived late fee on delayed filing of monthly return GSTR-3B and tax payment for the months of March and April and also cut interest rate for late filers. Taxpayers with a turnover of over Rs 5 crore have been given 15 days extra time to file monthly summary return GSTR-3B and pay taxes without paying any late fees. They would be required to pay a lower 9 per cent for these 15 days, after which the rate would be 18 per cent.

While those with a turnover up to Rs 5 crore in the preceding financial year have 30 days more time from their original due date for filing 3B returns for March and April, with late fee waiver. Interest rate would be ‘Nil’ for the first 15 days, post which it would be 9 per cent. After 30 days, a 18 per cent interest would be levied.

The Central Board of Indirect Taxes and Customs (CBIC) on May 1 issued the notification, saying that these relaxations come into effect from April 18. Also the due date for filing April sales return GSTR-1 has been extended till May 26, from the original due date of May 11.

For composition dealers filing sales return GSTR-4, the deadline for filing returns for the financial year ended March 31, 2021, has been extended by a month till May 31. AMRG & Associates Senior Partner Rajat Mohan said owing to Covid induced exigencies, the government has introduced compliance-related reliefs for the block of two-month March and April, 2021. Every taxpayer of the country is eligible for some form of extension irrespective of the size of operations.

“Large taxpayers will enjoy a full waiver of late fee, and partial relief in levy of interest wherein GSTR -3B filings are delayed up to 15 days. However, small taxpayers will enjoy similar benefits even if such filings are delayed up to 30 days,” Mohan added.

While businesses file GSTR-1 of a particular month by the 11th day of the subsequent month, GSTR-3B is filed in a staggered manner between 20th-24th day of the succeeding month.

Source: The Financial Express

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Covid wave to shrink cotton consumption by 8 per cent

The Government of India’s top cotton crop assessment body has projected cotton consumption to dip by a little more than 8 per cent owing to the latest Covid-19 wave and the subsequent lockdowns in several States.

The Union Ministry of Textiles’ Committee on Cotton Production and Consumption (COCPC) has reduced cotton consumption for season 2020-21 (October to September period) from 330 lakh bales (each of 170 kg) to 303 lakh bales, primarily due to the current lockdowns as the severe second wave of Covid has gripped the entire nation.

Cotton sector divided over prospects of higher acreage

In the COCPC meeting held on April 30, the estimated cotton closing stock has been increased from the earlier projected 98.79 lakh bales to 118.79 lakh bales at the end of the season on September 30, 2021.

Exports likely to take a hit

The COCPC, which was formed in September 2020 replacing the erstwhile Cotton Advisory Board (CAB), has also curtailed the projected cotton output for the season from the earlier estimated 371 lakh bales to 360 lakh bales.

While cotton imports are estimated to remain stable at 11 lakh bales for the year, exports are likely to take a hit from earlier projections of 75 lakh bales to 70 lakh bales.

“Indian cotton sowing area has been increased from 133.73 lakh hectares to 134.77 lakh hectares. The big change was in Punjab, where sowing was reduced from 3.92 lakh hectares to 2.48 lakh hectares, whereas in Karnataka it increased from 6.37 lakh hectares to 8.17 lakh hectares,” COCPC noted.

Higher global offtake to boost India’s cotton shipments

For the year 2020-21, which started from October 1, 2020, with estimated opening stock of 120.79 lakh bales, the total cotton supply is projected to be 491.79 lakh bales, which includes 360 lakh bales of crop as per the latest estimates and 11 lakh bales of imports besides the opening stock.

Total demand is projected at 373 lakh bales, including 303 lakh bales of domestic consumption and 70 lakh bales of cotton exports.

Notably, cotton trade body, Cotton Association of India (CAI) has estimated India's cotton output for the year at the same level as of COCPC i.e. 360 lakh bales. However, it has projected total consumption of 330 lakh bales during the year, leaving the closing stock of 106 lakh bales.

Source: The Hindu Business Line

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GST collection for April of Rs 1,41,384 crore sets new record

The gross GST revenue collected in the month of April was at a record high of Rs 1,41,384 crore, data released by the government showed.

Out of the total amount collected, CGST stood at Rs 27,837 crore, SGST at Rs. 35,621, IGST at Rs 68,481 crore (including Rs. 29,599 crore collected on import of goods) and Cess at Rs. 9,445 crore (including Rs. 981 crore collected on import of goods).

In line with the trend of recovery over past six months, the revenues for the month of April 2021 are 14% higher than the revenue collected last month. In April, the revenues from domestic transaction (including import of services) are 21% higher than the revenues from these sources during the last month.

GST revenues have not only crossed the Rs 1 lakh crore mark successively for the last seven months, but have also shown a steady increase.

Source: The Economic Times

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Trent Ltd. reports net profit of Rs. 17.44 crore in Q4

Trent Ltd., the retail arm of prestigious Tata Group, has reported a consolidated net profit of Rs. 17.44 crore in fourth quarter ended March 2021 while its revenue recorded Rs. 906 crore.

The revenue was Rs. 842.93 crore in the corresponding period of last fiscal.

The company had posted a net profit of Rs. 3.21 crore in the January-March period a year ago.

The company said that its financial performance for the current quarter and year are not comparable with the previous fiscal as it has been impacted by COVID-related developments.

For the fiscal year 2020-21, Trent reported a net loss of Rs. 181.13 crore. It had posted a net profit of Rs. 105.97 crore in the previous year.

Noel N. Tata, Chairman, Trent Ltd. said, “As I look back at the last financial year, we are very encouraged by the consistent and strong recovery of demand for our concepts in many markets across the country, when the pandemic-related restrictions eased. We continued to emphasise our expansion programme and I am happy to report that we have over 300 fashion stores in our portfolio and a significant number of additional locations fitted-out and ready to open.

Over the medium-term outlook, the company said it is ‘cautiously optimistic’.

Trent would continue to focus on building differentiated brands and strong expansion of its reach through stores and digital platforms, it added.

Trent Ltd. operates Westside, one of India’s leading chains of fashion retail stores, Trent Hypermarket, which operates in the competitive food, grocery and daily needs segment, Landmark Stores and Zudio.

Source: Apparel Online

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INTERNATIONAL

Export earnings rise by 8.74pc to $32.07b in July-April

The country’s export earnings in the July-April period of the current financial year 2020-21 grew by 8.74 per cent to $32.07 billion from $29.49 billion in the same period of the previous fiscal year riding on moderate performance of readymade garments.

Export earnings in April 2021, however, increased by 502.75 per cent to $3.13 billion from $520.01 million in the same month of the previous year, according to the Export Promotion Bureau data released on Sunday.

The country’s RMG factories remained almost closed in April 2020 as the government announced a general holiday to contain the coronavirus outbreak.

Exporters said that the export data showed positive growth in the first 10 months of FY21 compared with that in the same period of the previous fiscal year as the pandemic caused business to come to a halt on both the local and international markets.

A comparison of the export data with the scenario of 2020 would not show the real picture and the data should rather be compared with that of FY19, they said.

The EPB data showed that export earnings from RMG in July-April of FY21 grew by 6.24 per cent to $26 billion from $24.48 billion in the same period of FY20.

Earnings from woven garments in July-April of FY21, however, fell by 2.71 per cent to $12 billion from $12.34 billion in the same period of the previous fiscal year.

Export earnings from knitwear in the first 10 months of FY21 grew by 15.34 per cent to $14 billion from $12.13 billion in the same period of FY20.

The data showed that export earnings from home textiles in JulyApril of FY21 grew by 54.12 per cent to $956.93 million from $620.9 million in the same period of FY20.

Earnings from leather and leather goods in the first 10 months of FY21 grew by 8.56 per cent to $760.92 million from $700.93 million in the corresponding period of FY21.

Earnings from leather-footwear exports in July-April of FY21 grew by 11.76 per cent to $461.72 million from $413.15 million while other leather products fetched $203.10 million with a 2.94-per cent growth in the period.

Export earnings from jute and jute goods in the 10 months of FY21 grew by 30.88 per cent to $1.03 billion from $791.33 million in the same period of FY20.

Export earnings from agricultural products in the period increased by 9.1 per cent to $824.59 million from $755.8 million.

Export of engineering products in July-April of FY21 grew by 66.78 per cent to $435.74 million from $261.26 million in the same period of the previous fiscal year.

Export earnings from frozen and live fish declined by 4.17per cent to $394.73 million and earnings from shrimp export fell by 11.92 per cent to $261.63 million in the 10 months of FY21.

Source: NewAge Business

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Hong Kong's Mills Fabrica setting up new physical hub in UK

The Mills Fabrica, a global platform for sustainable and social innovation, is setting up a new physical hub in the UK. Founded as the innovation arm of Hong Kong-based property regeneration project The Mills, expansion of the platform to London is the next step in bringing together innovators and entrepreneurs to work towards a more sustainable future.

Based in the heart of London’s vibrant King’s Cross tech district, The Mills Fabrica will launch its UK outpost in early June with the opening of Cottam House – a three-storey Victorian warehouse in the Regent Quarter. The Mills Fabrica’s London base will comprise a start-up incubator, an investment platform, high-spec labs, strategic collaborations to solve high profile industry problems, a membership-driven co-working space, alongside a curated programme of cultural and industry events, and an experiential retail space and café both open to the general public.

The London site will be overseen by head of UK, Christian Layolle, formerly the global head of Business Development at The Business of Fashion (BoF), the leading resource for the global fashion industry. Founded by Vanessa Cheung, the granddaughter of Hong Kong-based property developer the Nan Fung Group, The Mills has a mission to create and lead a global community of people who are taking action to make the world more sustainable.

Committed to championing and popularising companies and individuals who are using tech and innovation to help develop a circular economy, The Mills Fabrica is positioned to bring together voices in fashion and food innovation from around the globe. Its growing network of industry partners includes Central Saint Martins, HKRITA (The Hong Kong Research Institute of Textiles and Apparel) and Fashion for Good. Its notable investment portfolio includes new material innovators Renewcell, Mango Materials and Geltor; supply chain pioneers Huue, Chain of Demand and brands driven by sustainable design and on-demand manufacturing such as Unspun.

For its pioneering cross-border tech incubation programme spanning both Asia and the UK, The Mills Fabrica will focus on the fashion and food industries with an emphasis on sustainable innovations. The Mills Fabrica’s offering to start-ups incorporates a powerful platform of industry partners, investors and leading research centres; an extended 12-month incubation period, access to tech-lab spaces, a home in a neighbourhood of like-minded and collaborative innovators and unrivalled opportunities for international expansion into new markets.

As the fashion industry continues to move towards a circular economy, The Mills Fabrica will help drive the innovations needed to completely design out waste from the industry. Via its programme, The Mills Fabrica will support start-ups enabling better and more efficient supply chain and production processes, alternative material innovators, as well as new platforms and business models focused on enabling greater sustainability and circularity reducing negative environmental and social impact. The inaugural UK incubatees include Reflaunt, Smartzer, Colorifix and Modern Synthesis.

Rising stars working within the ag-food tech sectors will also be invited to apply to its incubation programme. Focus areas will include future foods, such as novel ingredients with better nutrition and carbon impact, supply chain innovations like crop and animal health or precision agriculture and circular solutions addressing food waste. Startups joining will be able to benefit from its strategic partnerships and advisors including leading investment funds AgFunder, SOSV and Idea Farm Ventures.

Tapping into Nan Fung’s wider business and expertise in scaling biotech innovations via the NF Life Sciences arm advantageously positions The Mills Fabrica to reach consumers in China through its retail footprint, in addition to NF’s Health and Wellness branch spanning from hospitals and health centres.

Founder Vanessa Cheung says, “We are excited to be opening our doors in the UK. Over the past year it has been a pleasure to work with our various international partners in this region be it universities, retailers or other incubators and investors. With this new expansion, we look forward to working with new and current partners in building out an international community of innovators and to continue to support these innovators to take their ideas to market.”

Head of UK Christian Layolle believes that building a sense of community is vital. “We like to describe ourselves as ‘ecosystem builders.’ As a platform, we’re able to connect the dots between various stakeholders from the startups innovating, to the corporates implementing at scale, to the NGOs and governments regulating, all the way to inspiring and helping students. We look forward to seeing this come to life in London in the next few months.”

Source: Fibre2Fashion News

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Bangladesh eyes Guinea Bissau as new export destination

Bangladesh has shown interest to boost exports, including readymade garments, to the West African country Guinea Bissau. The South Asian emerging country is looking to boost relations with Guinea Bissau to explore trade potential.

Bangladesh has requested the West Africa country of Guinea Bissau to, reportedly, consider accrediting a non-resident Ambassador to the country (Bangladesh) for continuing a regular contact both ways to help increase relations between the two countries.

According to media reports, Bangladesh has further maintained that the trade between the two countries was not up to the aptitudes. And suggested that the West African country can import quality goods at affordable prices from Bangladesh, such as apparel items along with ICT products, pharmaceuticals, bicycles, motorcycles, ceramics, etc.

Even as the Bangladesh Ambassador to Portugal, Tarik Ahsan, on 27 April presented his credentials to the President of Guinea Bissau Umaro Mokhtar Sissoco Embalo in the capital city Bissau as the non-resident Ambassador to that country with residence in Lisbon.

Citing Bangladesh’s success in grassroots level development, Tarik Ahsan viewed that, in a spirit of South-South cooperation, Bangladesh and Guinea Bissau can cooperate and exchange best practices, particularly in rural development and agriculture.

He attached importance to working together at multilateral fora on the common issue of climate change.

The reports further added that not only Umaro Mokhtar Sissoco Embalo expressed willingness to concurrently accredit a non-resident Ambassador of Guinea Bissau to Bangladesh but also showed keen interest in expanding cooperation with Bangladesh, particularly in the proposed areas of trade and capacity building even as he suggested that the Foreign Ministers of the two countries remains in contact for promoting the cooperation.

President warmly welcomed the Ambassador to Guinea Bissau and congratulated him on being the first Bangladesh Ambassador to present credentials in his country.

The President expressed his belief that bonds of friendship between Bangladesh and Guinea Bissau would be further strengthened in the days to come.

He assured the Ambassador of all cooperation and support during his tenure as Ambassador to Guinea Bissau.

Source: Textile Today

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The Economics of the China-India-Sri Lanka Triangle

Sri Lanka’s relationship with China has been a controversial discussion during the last decade, dominating both domestic and international political conversations. The strengthening relationship between the island nation and the emerging global power has been largely economic. Yet it is quite clear that Sri Lanka’s closest neighbour, India, and the United States are diligently monitoring these developments in the China–Sri Lanka relationship.

China has been a major economic partner for Sri Lanka. Beijing’s assistance has been crucial in saving the poorly performing Sri Lankan economy during the last three years. At the same time, Sri Lanka is compelled not to antagonize India, its closest neighbour, with which Sri Lanka’s relationship runs deep and far back. The India–Sri Lanka relationship is vastly different than its ties with China.

With India, Sri Lanka’s relationship during the post-colonial era goes well beyond economic relations. India has been extremely influential in Sri Lanka’s domestic politics. For instance, India played a key role in introducing the 13th Amendment to the Constitution of Sri Lanka, which brought power devolution to the country to provide a solution to Sri Lanka’s ethnic conflict. Concerns about the problems of Tamil minorities living in Sri Lanka are often amongst the political discussions in India, especially in Tamil Nadu.

In 1987, India sent its army to fight against the LTTE, which demanded a separate country for Tamils in Sri Lanka. The mission is often considered a failure, and the then-Indian premier, Rajiv Gandhi, called back the Indian army given their failure to defeat the LTTE. Later, the LTTE killed Gandhi, claiming revenge for the operations against the LTTE. The war between the Sri Lankan government and the LTTE ended in 2009. However, the concerns about power devolution to the Tamil minority remain unaddressed and India has been consistently pushing Sri Lanka for full implementation of the 13th Amendment. Most recently, the same concern was raised by India’s External Affairs Minister S. Jaishankar during his visit to Sri Lanka in early 2021.

China’s relationship with Sri Lanka has been vastly different, due in part to China’s greater distance from the island. While China has been an ally of Sri Lanka in the post-independence period, its involvement in Sri Lanka’s domestic affairs has been minimal. The growth of the China–Sri Lanka relationship is a recent phenomenon and one largely anchored on economic and financial ties. However, in recent years, military and political relations between the two countries have also grown.

Rise of Economic Relations with China

Upon upgrading to a middle-income country, Sri Lanka has been heavily exposed to severe and recurrent Balance of Payment (BOP) crises. This compelled successive governments to seek solutions to escape from economic troubles, which resulted in stronger economic ties with China – and an increased reliance on China in Sri Lanka’s development process.

While there are many vague claims about the strengthening economic relationship between Sri Lanka and China, which sometimes includes claims such as Sri Lanka becoming a cat’s-paw state for China, it is vital and essential to investigate the avenues through which bilateral economic relations have developed and the underlying reasons. While much discussion of the growing China–Sri Lanka relationship has focused on the increased reliance on Chinese loans, which is often (and inaccurately) depicted as Sri Lanka falling into a Chinese debt trap, growing bilateral economic relations go far beyond debt. The blooming China–Sri Lanka economic relationship, which Colombo seems to cherish as a blessing currently, is taking place through three main avenues: debt, investment, and trade. Therefore, restricting the focus of Sri Lanka’s reliance on China to merely Chinese loans downplays the growing relationship between the two countries.

In terms of public debt, China over the last decade and a half has been the second-largest foreign lender for Sri Lanka. Several large infrastructure development projects, including the Colombo–Katunayake expressway, which connects the main commercial city and the major airport; Hambantota Port; and the second international airport of the country, Mattala Airport, all were funded by Chinese loans. This of course has been a much-discussed phenomenon, used to strengthen claims of debt-trap diplomacy.

By the end of 2019, China owned a little over 10 percent of Sri Lanka’s outstanding foreign debt stock. While most of these debts consist of loans obtained for large-scale infrastructure development projects, recently obtained Chinese loans were for budgetary and BOP support.

On top of that, in early 2021, the Sri Lankan government obtained a 10 billion Renminbi (RMB) currency swap facility from China to tackle the ongoing foreign currency shortage. These indicate Sri Lanka’s changing relationship to Chinese loans and increasing reliance on loan instruments such as Foreign Currency Term Financing Facilities and swaps to save the country from a severe Balance of Payment crisis, or even from defaulting on its debt.

Sri Lanka obtained a Foreign Currency Term Financing Facility (FTFF) of US$ 1 billion from the China Development Bank (CDB) in 2018, and another US$ 500 million in March 2020. Most recently, in early April 2021, Sri Lanka signed another agreement with the CDB to obtain US$ 500 million as an FTFF. These loan facilities, along with the currency swap provided in March 2021, indicate that Sri Lanka is heavily relying on China to avoid external sector vulnerabilities (i.e., BOP issues).

Secondly, similarly to Chinese lending, over the past decade, Chinese investments have also played a crucial role in Sri Lanka’s economic development. During the decade of 2010–2020, China has been the largest foreign investor in Sri Lanka. These investments include two controversial projects: the Colombo Port City Project and the investment in Hambantota Port by the China Merchants Port Company. Under the Port City project, 116 hectares of reclaimed land in Colombo was leased to CHEC Colombo Port City (Pvt) Ltd, owned by a Chinese state-owned enterprise for 99 years. The Port City project has drawn much controversy in the recent past. The Opposition claims that proposed legislation intended to facilitate investment in the Port City threatens Sri Lanka’s sovereignty.

Third, during the last two years, China has become the top import partner of Sri Lanka, surpassing India, which had long been Sri Lanka’s largest source of imports. In 2020, China continued to be the largest goods exporter to Sri Lanka despite the heavy import restrictions imposed by the Sri Lankan government to control foreign currency outflows. This policy, however, does not seem to have affected China as much as it impacted India. Chinese imports were reduced by 8 percent in 2020, while in contrast, imports from India went down by approximately 19 percent.

The reason for is the type of goods imported from China. Over the years, China has become the major source from which Sri Lanka obtains raw material for textiles and garments. These, in turn, are the major merchandise exports for Sri Lanka; 45 percent of Sri Lankan exports are textiles and apparels. The availability of textile raw materials, such as yarn and fabric, at a low price from Chinese suppliers appears to be the major reason for Sri Lanka to import these goods from China instead of from India or Pakistan, which previously used to be major importers of textile materials to Sri Lanka.

India’s Economic Role in Sri Lanka

What is interesting to notice is how Sri Lanka’s economic relationship with India had progressed through these same three avenues: debt, investment and trade. India has never been a major lender for Sri Lanka, nor can they lend to Sri Lanka in a capacity similar to China. Unlike China, India runs on a trade deficit above $100 billion and runs into foreign exchange issues from time to time. This means India’s lending capacity is limited and their lending support will largely be based on export credits.

However, up until this year, Sri Lanka had been relying on India to manage its foreign exchange problems by obtaining currency swaps. Early this year, though, India refused to extend the term of its currency swap agreement with Sri Lanka, quoting concerns about Sri Lanka’s economic climate. New Delhi said it was unwilling to extend the swap facility unless Sri Lanka entered into an IMF programme.

To many, however, this seemed like retaliation for Sri Lanka’s sudden reversal on a deal to lease a part of the East Container Terminal (ECT) of the Colombo Port to the Indian business conglomerate Adani Group. Having promised earlier to lease out 51 percent of the ECT to India, amid rising opposition from nationalist groups, the Sri Lankan government abruptly reversed course, claiming they had decided not to lease the terminal.

This could be a concern for India for a few reasons. First, 85 percent of the Colombo International Container Terminal (CICT), which is the largest terminal of the Colombo Port, is controlled by China Merchant Port Company, which operates as a joint venture with the Sri Lanka Ports Authority (SLPA). This deal was also inked under a Rajapaksa government, a few years back. Second, the Hambantota Port was leased to China for 99 years and the deal went ahead despite the controversies surrounding it. Against such a backdrop, India inevitably feels that they are being undermined or ignored in light of the growing presence of China.

However, Sri Lanka’s Cabinet has cleared the West Container Terminal (WCT) of the Colombo Port to be developed as a 35-year joint venture with India’s Adani Group and its local partner, John Keells Holdings PLC, as well as with an investment from Japan.

This brings us to the question of investment. Sri Lanka has received very little FDI from India and that number looks even smaller in comparison to the investment from China during the past decade. Additionally, the number of Chinese investments in Sri Lanka has been state-led and governed by strategic interests. The two best examples of such investment are the Colombo Port City and the Hambantota Port, both of which serve strategic purposes for China.

India, on the other hand, has made no such investments in Sri Lanka. Perhaps the only investment India has made that is of strategic interest is the Lanka Indian Oil Company, a subsidiary of state-owned Indian Oil Company, which controls approximately 15 percent of the auto fuel supply in Sri Lanka. This investment was facilitated in 2003 as a part of the then-government’s policy to break the state monopoly in fuel distribution. Since then there have been very little strategic FDI coming into Sri Lanka from India.

Trade has been the strongest part of the economic relationship between India and Sri Lanka. Historically, India has been Sri Lanka’s largest source of imports, until China surpassed India recently. The very first free trade agreement (FTA) of Sri Lanka was signed with India in 1998 and interestingly, the Indo–Sri Lanka Free Trade Agreement (ISFTA) was the very first FTA for India as well. This FTA has been in effect for a little over two decades now and there have been a few efforts to expand the FTA to an Economic and Technology Cooperation Agreement. However, these negotiations failed given the strong opposition of nationalist groups and professionals, as well as a regime change in Sri Lanka.

While there are issues regarding the Indo–Sri Lanka FTA, including concerns on non-tariff barriers imposed by India, more than 70 percent of Sri Lanka’s exports to India are routed through the FTA, utilizing the tariff-free access. India on the other hand takes little advantage of the FTA benefits. As per existing data, only 10 to 20 percent of Indian exports are routed through the ISFTA to Sri Lanka. What is interesting to note is that China has overtaken India as the largest exporter to Sri Lanka without having an FTA with Sri Lanka, and thus without any tariff-free access.

China becoming the largest importer to Sri Lanka, including the major supplier of raw material to Sri Lanka’s textile industry, has significantly increased Sri Lanka’s reliance on China in the trade front. This may have been seen as less of a concern compared to growing reliance on Chinese loans; however, the recent decision of Sri Lanka to obtain a 10 billion RMB credit swap from China was a clear indication of increasing Chinese influence tied to the rise of Chinese imports.

However, Sri Lanka’s exports to China have failed to match the growth of Chinese exports to Sri Lanka. In 2020, Sri Lanka’s exports to China amounted to just 2.3 percent of total exports, while exports to India represented 6.1 percent of total export. Sri Lanka relies more on India as an export market, especially as most of its products can enter India tariff-free, thanks to their FTA.

Balance of Power

Currently, the Sri Lankan economy is grappling with serious external sector issues. The country is struggling to meet its foreign debt repayments due to insufficient foreign currency inflows. With the COVID-19 pandemic, the situation worsened, largely due to the significant loss of tourism earnings, which constitute a major foreign currency inflow for Sri Lanka. On the other hand, Sri Lanka’s foreign debt repayment obligations remain the same.

Taken together, the circumstances have put Sri Lanka in a vulnerable position. The biggest concern is that Sri Lanka cannot address its problems as merely a domestic political issue. Tackling Sri Lanka’s external sector vulnerabilities, including the shortage of foreign currency, will require support from external parties, whether China, India, the United States, or even international organizations such as the IMF or World Bank.

Thus far, Sri Lanka has excessively relied on China to tackle its external sector vulnerabilities while economic relations with India seem to remain stagnant. At the same time, Sri Lanka tries not to irritate India. Against this backdrop, Sri Lanka is now struggling hard to balance between China, India, and domestic nationalists, all the while trying to save the country from a potential economic crisis.

Source: The Daily News

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