Published on: September 20, 2022

Free Trade Agreement (FTA)

Free Trade Agreement (FTA)

Why in news?

Sri Lanka will revive its Free Trade Agreement (FTA) with India and upgrade it to a “a comprehensive economic and technological partnership”, President Ranil Wickremesinghe has said, signalling Colombo’s willingness to revisit a stalled pact.

Free Trade Agreement (FTA):

It is a pact between two or more nations to reduce barriers to imports and exports among them.

Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

The concept of free trade is the opposite of trade protectionism or economic isolationism.


  • The current Indo-Sri Lanka Free Trade Agreement (ISFTA) came into effect in 2000 and several rounds of bilateral discussions later, Colombo and New Delhi are yet to reach an agreement on its upgraded version.
  • Wickremesinghe, as Prime Minister between 2015 and 2019, attempted to sign an upgraded trade pact with India, but was unsuccessful.

Focus on energy

  • Speaking of areas with potential for bilateral cooperation, Mr. Wickremesinghe referred to the “long-term energy solution”, the power grid connection between India and Sri Lanka, offshore wind energy, the solar power plant at Sampur and the renewable energy projects on three islands of Jaffna Peninsula.
  • The Trincomalee Oil Tank Farm project, being developed with Indian assistance, as having “big potential”, would further develop itself as a logistics hub.

Shared History and Ethnic Issues in the Indo Sri Lanka Relation

  • It is believed that Ashoka, Emperor of the Mauryan family, sent his agents to Sri Lanka. These Buddhist missionaries were responsible for introducing Buddhism to several areas.
  • India’s Chola and Pallava dynasties had long invaded Sri Lanka.
  • Sri Lanka gained Independence in 1948 and was peaceful until ethnic tensions led to a divide between the majority Sinhalese and minority Tamil communities.
  • The Sinhala Act was introduced in 1956, declaring Sinhala as the sole national language and compromising Tamil-speaking voters.
  • There was a civil war in Sri Lanka in the 1980s. The LTTE terrorist group had become a significant threat. India helped Sri Lanka with the Indian Peace Keeping Force (IPKF), but stress between the two countries increased with mounting hostility between the IPKF and the LTTE, and India was forced to withdraw the IPKF in 1990.
  • Political relations between the countries stabilised with the end of the three-decade-long armed conflict between LTTE and Sri Lankan forces in May 2009.

India-Sri Lanka Free Trade Agreement (ISFTA) 

  • The India-Sri Lanka Free Trade Agreement, signed in 1998 and entered into force in 2000, provides the best framework for bilateral trade between India and Sri Lanka. The Basic Premise within the ISFTA has supported asymmetries between the two economies, native socio-economic sensitivities, safeguards to shield domestic interests, and revenue implications not to impact high-revenue-generating tariff lines.
  • In 2018, the India-Sri Lanka Free Trade Agreement amounted to trade worth $4.93 billion. The same year, exports from India to Sri Lanka amounted to $4.16 billion and $767 million from Sri Lanka to India.
  • India invested over $1.2 billion in areas like telecom, commercial enterprises and IT, retail, and land, making it one of the largest investors in Sri Lanka.

Debt Problem of Sri Lanka

  • Sri Lanka’s total debt is approximately $60 billion, and it owes about $9 million in yearly repayments.
  • China has been accused of engaging in debt diplomacy by taking over Hambantota port from Sri Lanka. It will lease it for 99 years, and there are worries that it is because they want to address Sri Lanka’s lack of repayment.
  • As Sri Lanka defaults on loans, they risk losing physical assets to China. India is concerned about this because it could be a security threat.

Defense/Strategic Relations

  • Both navies participate in bilateral naval exercises such as SLINEX. Both armies also participate in the Mitra Shakti bilateral drills.
  • There is a dialogue mechanism between the three National Security Advisors of India, Sri Lanka, and the Maldives. It has also been translated into embarking on a naval exercise together.
  • The Easter attacks of 2019 have revived the cooperative India-Sri Lanka Relations on the issue of terrorism. National Thowheed Jamath, a terror group based in Tamil Nadu, India, organised th1ese killings in Sri Lanka. In response to the Sri Lankan attacks, India shared intelligence. Unfortunately, this information was ignored.