India's next generation FTA - the Economic and Technical Cooperation Agreement - with Sri Lanka seems to be running into rough weather. Sri Lanka's trade and industry has not been happy with the earlier FTA that was signed in 2000 with India. Sri Lanka’s exports to India have grown 275 per cent since 2005-06. And India's exports to Sri Lanka have grown 96.48 per cent during the same period.

Negotiations on both sides are on to iron out differences on the upgraded Free Trade Agreement of 2000 to include services, investment and technological trade. There are reasons for India to guard its flanks while negotiating a second generation free-trade agreement with Sri Lanka.

China has evinced interest in an FTA with Sri Lanka as well. This has given India pause, as it wants to see the details of that deal. This could include Chinese companies setting up manufacturing bases in Sri Lanka and using the India-Lanka FTA to push Chinese goods into India. In many segments, Chinese products have already flooded Indian markets.

Tariff and non-tariff barriers to protect local industries, visa regulations, entry barriers to investment are some of the important reasons South Asian regional trade has remained fragmented.