Time to rethink export diversification – with India in mind

By Dhananath Fernando

Originally appeared on the Morning

The call to diversify Sri Lanka’s export basket is not new; it’s a conversation that has spanned decades.

For the most part, our approach has relied on supporting Small and Medium-sized Enterprises (SMEs), extending credit, and helping companies find overseas buyers – largely driven by the Export Development Board (EDB).

During the ‘Yahapalana’ Government, Sri Lanka unveiled a comprehensive National Export Strategy (NES) targeting six promising sectors:

• Information and Communication Technology (ICT) and Business Process Management (BPM)

• Wellness tourism

• Boating and shipbuilding

• Electrical and electronic components

• Processed foods and beverages

• Spices and concentrates

In addition, four cross-cutting areas were introduced to complete the export ecosystem:

• Logistics: streamline supply chains and reduce time-to-market

• National Quality Infrastructure (NQI): upgrade testing, certification, and compliance standards

• Innovation and entrepreneurship: promote R&D, tech adoption, and startup growth

• Trade information and promotion: enhance market intelligence, branding, and buyer linkages

This strategy was widely appreciated at the time. Even the EDB Chairman appointed under President Gotabaya Rajapaksa’s administration pledged to take it forward. But strategies need to evolve. And now, the context has shifted.

A case in point is how Ceylon Cold Stores (CCS) – a subsidiary of John Keells Holdings (JKH) – has taken a new route into India. Rather than exporting directly, as it unsuccessfully attempted in the past due to India’s non-tariff barriers, it has now partnered with Reliance Consumer Products. Through this partnership, CCS products will be distributed across 18,000 Indian outlets.

If the venture proves successful, we could see CCS expanding operations further, either producing in Sri Lanka for export or even setting up shop in India. This is a powerful lesson; if we are truly serious about diversifying exports, India is a market we can’t afford to ignore. But the route may not always be direct; it could mean partnerships, joint ventures, or becoming part of Indian supply chains.

And it’s not just consumer goods. While CCS is expanding into India, some Sri Lankan banks, now holding excess US Dollar reserves, are looking to partner with the Gujarat International Finance Tec-City (GIFT City).

Several bank CEOs in Sri Lanka who have already invested have stated that their goal is to support Sri Lankan companies investing in India – or even Indian companies operating here. In fact, many Sri Lankan service sector firms are already functioning in India. This is a clear signal: the momentum has shifted. The landscape is changing and we are slow to adapt.

Meanwhile, India is also reshaping the global trade map. It has already signed a Free Trade Agreement (FTA) with the UK, and is in the final stages of a similar deal with the European Union (EU). Under the UK deal, 99% of Indian exports to the UK will be tariff-free, and 90% of UK goods will get similar access to India – significant reductions even for alcohol products.

Once the EU deal is signed, exporters will have even more incentive to route products from India, especially given Sri Lanka’s uncertain GSP+ status. So, if we try to compete head-on with India in the same markets, we may be setting ourselves up for disappointment. Instead, we should look at how we can complement India – join its supply chains and offer what India alone cannot.

One such overlooked area is electricity exports. Back in 2016-’17, when the NES was developed, the potential of renewable energy in Sri Lanka was limited. Today, that picture has changed dramatically. Solar and wind investments have surged, and with the right policy push, electricity exports to India could become a serious reality.

This example illustrates a broader point: strategies must be dynamic. Markets evolve, technologies advance, and regional power equations shift.

India, for instance, is integrating rapidly with global and regional markets. Sri Lanka can ride that wave, or watch others benefit in our place. With geopolitical winds also shifting – particularly with the West looking for reliable partners in the region – India is too big to be left out of any serious trade or investment plan.

If we play our cards right, Indian growth could also drive investment into Sri Lanka, especially in sectors that support exports. But to unlock that opportunity, we need serious structural reforms:

• Industrial lands must be made available, ideally through private sector-led zones with minimal red tape and a streamlined Board of Investment

• Electricity sector reforms are non-negotiable – both to reduce domestic costs and to enable energy exports

• Trade facilitation through a modernised Customs act is essential to attract investors eyeing India via Sri Lanka

• Debt sustainability must be maintained – no investor will bet on a country flirting with default

• State-Owned Enterprises (SOEs) must be restructured to reduce the fiscal burden and unlock productivity

In short, if we are serious about export diversification, we must acknowledge that the rules of the game have changed. Old models won’t work in a new world. India is no longer just a neighbour; it is a gateway, a competitor, and a partner all at once.

The question is: will we adapt fast enough to matter?

Empowering Our SMEs

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Sajani Ramanayake

In recent months, there has been extensive debate around the topic of making Sri Lanka a hub for technology and innovation. Across the globe, small and medium enterprises (SMEs), particularly start-ups, have been proven as critical to fostering a culture of disruption and innovation. In Sri Lanka, SMEs are already an integral part of the economy and hold significant potential for achieving our economic vision. Despite this, many of these businesses continue to face debilitating obstacles to growth due to an unfriendly regulatory environment.

Why are SMEs important?

Contributing to 45% of domestic employment and 52% of Sri Lanka’s gross domestic product (GDP), the role SMEs play in the Sri Lankan economy should not be underestimated. While these businesses do form the backbone of the economy, there is potential for growth that should be explored.

The National Export Strategy of Sri Lanka (2018-2022) acknowledges the need to “strengthen Sri Lankan exporters’ market entry capacities” and support “the integration of SMEs from across Sri Lanka into the export value chain”, as this would help increase the overall generation of income in the country. Currently, Sri Lanka lags behind other Asian countries in terms of export figures, and the expansion of SMEs is a good way to facilitate much-needed growth. If SMEs are provided with adequate resources and opportunity, they can plug into global value chains, capitalise on international markets, and drive innovation.

Currently, Sri Lanka’s export portfolio is relatively limited, with a small amount of companies accounting for a majority of export revenue, with SMEs providing a very minor contribution. This lack of export diversification in Sri Lanka’s portfolio thereby makes it particularly vulnerable to the external economic environment and reduces national economic stability. Strengthening SMEs and their access to the export market could thereby present a viable solution to reducing these risks, while improving export earnings, diversifying our export portfolio, and transitioning Sri Lanka into a more complex economy.

What is stopping SMEs from growing?

A lack of finance has been identified as a key constraint by 59% of SMEs in Sri Lanka. SMEs lack the collateral that many lending organisations insist on and often cannot afford to pay the high interest rates charged on loans. Unavailability of accounts and financial information due to the inability to maintain proper accounting records and lack of know-how on business plan creation, also makes it difficult for SMEs to be eligible for loans.

Another problem that SMEs face is the sheer number of regulatory barriers. The clearing of imports and exports through customs as well as high credit periods can be challenging to small businesses. Taxes on imported raw material and capital goods also increase costs and reduce profits. There are also many licenses and permits that need to be obtained before obtaining state lands for business purposes, such as clearances from the Central Environmental Authority, Forest Department, and Department of Archaeology, depending on the nature of the business. This makes obtaining land difficult for SMEs, and deters potential entrepreneurs.

The lack of information and guidance for entrepreneurs about how to set up and expand their businesses is also a major hurdle. In a study conducted by the Ministry of Industry and Commerce, in conjunction with Ernst & Young and GiZ, about the institutional and regulatory framework relating to the SME sector in Sri Lanka, SMEs expressed a lack of understanding about potential export markets and opportunities, a lack of clarity on the process to obtain grants and lease agreements for state-owned lands for business purposes, and low awareness on applicable taxes and the benefits of registering for taxes.

What is being done to help SMEs?

One initiative that has recently been put in place is the establishment of “Empower” by the Colombo Stock Exchange (CSE) and Securities and Exchange Commission of Sri Lanka (SEC). Empower is a board dedicated to attracting SMEs to the CSE and seeks to improve access to finance for SMEs while also providing them with the opportunity to build credibility through the disclosure of information and by making governance standards more balanced. This not only helps attract investors, but also helps improve business visibility for the SME. The board allows SMEs to sell equity in order to raise capital – a major obstacle to growth for a large number of SMEs – essentially functioning as a miniature stock market for these enterprises. Listed companies receive guidance both during and after the listing process, and have access to one-on-one meetings, awareness sessions, and public consultations.

There are also other initiatives like export credit facilities provided by several banks seeking to ease the burden of pre and post-shipment financing, the Enterprise Sri Lanka credit programme which offers a range of loan schemes to SMEs, and workshops carried out by private sector companies such as Microsoft to help address a myriad of barriers faced by these businesses. Despite these initiatives, which are a positive step in the right direction, more needs to be done to help Sri Lanka cultivate a holistic ecosystem for SME growth.

One way to do this is by improving infrastructure facilities such as roads and highways to improve connectivity. This would assist in reducing regional differences in the setting up and operation of SMEs, as people and capital become more mobile. Sri Lanka also needs to streamline its regulatory mechanisms if it wants to help SMEs reach their full potential. Currently, there are at least 43 different institutions affiliated with SME governance in Sri Lanka, resulting in a climate of fragmented governance and poor information. Other potential solutions could include the creation of a dedicated export-import bank to ease access to finance and the establishment of an advisory board comprising exporters, academic experts, bankers, and professionals to enhance the ability of SMEs to formulate strategies and products that meet client expectations and emerging market needs.

If Sri Lanka wants to improve economic growth in the country, it is crucial that concrete strategies to improve productivity and increase export volumes are implemented. If Sri Lanka is to remain competitive on the world stage, SME growth is crucial.

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