26 September, 2020

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Should The Adverse Trade Balance With India Be A Matter Of Concern

By R.M.B Senanayake

RMB Senanayake

Minister G.L Pieris is reported to be discussing with the Indian government the adverse balance of trade Sri Lanka has with India and presumably to ask India to buy more from us. India is a large country several times our size and it is natural that the trade balance is adverse to us. But if every country seeks to balance its trade with each other, then international trade would be seriously reduced. Economists have proved the benefits of free trade. Trade is beneficial to both parties, a fact that our politicians don’t seem to realize. This debate is going on strongly in USA where various lobbies want the U.S government to ban or impose protectionist taxes on Chinese goods like tyres and solar panels. Seeking exports’ as a rationale for protectionism  is centuries old; it has been addressed countless times by economists.

Free Trade benefits both countries and tariffs to curb imports from a country which runs a favorable trade balance with us is condemned by economists since Adam Smith. This isn’t as intuitively obvious as economists think it is. Pointing it out won’t be sufficient. It needs to be explained in a way that makes it clear to people who are more used to believing the evidence of their eyes than thinking in terms of “the seen and the unseen”.

The trade account is only part of the external transactions of one country with another. There are the services provided by residents to non-resident Indians such as the spending of Indian tourists in Sri Lanka. India is today a large supplier of tourists to Sri Lanka. We need to know the current account in our Balance of Payments with India.

Since India runs a surplus with Sri Lanka it means that Indians are investing in assets in Sri Lanka –either real assets or financial assets. If there is a trade account imbalance it will be offset by either other transactions in the Current Account or in the Capital account. I tried to compile such an account for our Balance of Payments with India but couldn’t find any published data. It only means  Sri Lanka is a net borrower from India.  Since India is running a large trade surplus with Sri Lanka the Indian government should allow Indian banks and companies to lend to Sri Lankan companies in Indian Rupees.

Suppose my neighbor sets up a factory here does it make me poorer?  If not, why would my global neighbor, an Indian opening a factory here make me poorer?

I like to close with a quotation from Adam Smith in his Wealth of Nations. Adam Smith’s Wealth of Nations – a quotation that proves that concerns such as our policymakers  have proven again and again to be without merit, and have been addressed by serious economists since the launch of the discipline:

“There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavorable balance of trade.  After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favor and against their neighbors, it does not appear that any one nation in Europe has been in any respect impoverished by this cause.  Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system [i.e., mercantilism] would lead us to expect, have been enriched by it.”

Nepal has special payments agreement with India . We should explore possibility of using the Indian Rupee for carrying out our trade with India. The Asian Clearing Union has not been successful . Our Central Bank does not list the Indian currency notes as acceptable by our banks. If we do so we might be able to promote more services to Indians which will earn us extra foreign exchange. Of course the Indian government too should allow Indian Rupees repatriated to India through banks to be convertible to US dollars when our banks surrender them to Indian banks against dollars. Since Sri Lanka currency is too weak India will have to extend such a concession to us without reciprocity by Sri Lanka.

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Latest comments

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    We are buying more from India in the form of technology, hardware, textiles, agricultural produce etc. Indian prices are competetive and they have the advantage of lower freight and duty exemption. We have nothing much to offer india except for tea, rubber and betel.

    Unless our industries and organisations improve their efficiencies it is difficult to compete in the indian market. India has very cheap labour and raw materials. Also it is a free economy without much political interference at the local level.

    Sri Lanka is not that attractive a place for indian manufacturing industry due to the various political and racial problems. Govt policy and taxation is very fickle. There is no particular advantage for indians to invest here other than in joint ventures as a small part of their main operation. Market here too is very small.

    If Hambantota and environs is declared a free port then maybe indian companies would consider locating their logistical activities here mainly as a port for transhipment or limited assembly operations.

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    While appreciating that this piece of writing touches upon an extremely important aspect, it is strange that the issue of adverse trade balance is discussed only within a limited framework – currencies.

    Currencies are but one indication of trade balance. It would be appreciated if the future discourses on trade and trade balance between India and Sri Lanka also touch on terms of trade and what comparative advantages each country has in major goods and services sectors in a dynamic sense (as advantages vary) and if each country utilizes ( or not) and if our exchange rate and industrial policies work in tandem with them.

    It would be useful if such discourses also can spell out the relevance and validity of accounting for balance of trade in the current context with rapid capital and labour fluctuations (which is indicated by lack of data mentioned here) to a country, a region, and a locality – an Indian company setting up a factory in remote North East of SL employing mostly women with wages higher than current income levels in that region – specially because this writer asks similar questions, albeit with a narrow focus, hence missing much of the relevance of trade balance to different population groups, economic as well as geographical sense.

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    MR. RMB Senanayakae:

    It seems that you are hurting for India. You did not like that Sri Lanka asking for more Trade ?

    What is going on ?

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    Sri Lanka’s exports to India can have greater value except the good intentions of both Govts are frustrated by corruption in the form of
    State bureaucracies, mainly in Customs and Excise Depts on the Indian side. Biscuits, Processed meat products, Sanitary Ware, Gems & Jewellery from Sri Lanka have a market there except for these obstacles. e.g. If consignment of Dinner Sets with gold-bordered(not real gold) meant for a Bombay buyer is off-loaded in Chennai Port. In addition to the Duty/Excise in Chennai, it is subject to various formalities in the State Border from AP, Karnataka to Maharasthra – consuming valuable time, Storage charges and entailing several payment by way of taxes to the different States that come in between. In some instances Customs have insisted on prohibitive Duty imposed for Gold – unless ??? Here one must say those in Delhi who encourage these bilateral trade mean good. The problem is the corrupt bureaucracy on the way. Another area to reduce deficit is in using the good ship-repair and dockyard facilities in Colombo. India is already benefitting from Colombo’s facilities.

    Senguttuvan

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