An Analysis of the Impact of Indo-Lanka Free Trade Agreement and Its Implications for Free Trade in South Asia

Abstract

The Indo-Lanka Free Trade Agreement (ILFTA) which was signed in December 1998 between India and Sri Lanka has shown a promising start to trade liberalisation among SAARC (South Asian Association for Regional Cooperation) countries. This paper provides a quantitative assessment of the likely impact of the ILFTA. We perform simulations using the Global Trade Analysis Project (GTAP) model to quantify the impact of liberlised trade between Sri Lanka and India. GTAP is a computable general equilibrium (CGE) model of the world economy. Using the model simulations, the paper also examines the implications of extending the free trade agreement to other SAARC nations. Results indicate that both Sri Lanka and India will experience some welfare gains from ILFTA. The extension of such trade agreement to all SAARC nations may create significant welfare improvements in Sri Lanka.