While a free trade agreement between both nations which kicked in to gear in 2000, has opened the doors for Sri Lankans to invest and ship goods, Indians have also been quick to size up potential business opportunities.

As it stands, India is currently Sri Lanka's third largest export market, with around two billion dollars in bilateral trade and a trade balance in India's favour.

India is also the island's second largest investor, with investments of over 500 million dollars in the island.

"While trade between both countries have gone up, there are some bad experiences for Indian companies here like Lanka IOC, JV Gokal, Visen, Gujarat Ambuja," Indian High Commission's First Secretary (Commercial & Economics), Sunjay Sudhir told businessmen at a seminar organized by the Ceylon Chamber of Commerce.

Lanka IOC, a unit of Fortune 500 Indian Oil Corporation, warned Tuesday that their pumps will run dry by July unless the government pays up 76 million dollars in unpaid dues for selling oil below market rates.

The company said its 160 retail fuel outlets will run out petrol in 16 days, and diesel in about 41 days.

Lanka IOC recently reported a full-year net loss of 68.6 million dollars (7.07 billion rupees), and says it would have actually posted a small profit if not for the subsidy wrangle with the government.

"Sounds of such news (LIOC) going back to India are scaring other investors. LIOC's plans to put up a lubricant blending plant and that will remain in paper until the Sri Lankan government makes firm commitment to settle the debts," Sudhir said.

Though Indians are flocking here in droves, driving up tourist and business traffic, the cost of doing business in Sri Lanka is not that cheap.

"The power rates, the number of holidays, are excessive. There is also no proper Board of Investment policy on the number of expatriate staff that can work here," points out Sudhir.

His thoughts were shared by Oscar Braganza, Chief Executive of CEAT-Kelani Associated Holdings.

"Electricity cost here is around 35 percent higher than the region on average, interest rate spreads are high," he said.

Sri Lanka's long calendar of public holidays and mandatory wage increases not linked to productivity is also making it expensive to do business.

"A pre-post holiday absenteeism study done by us has showed that there are around 8-percent less working days here compared to India, China and Singapore. Holidays is a huge issue, but it can't be dealt with on a company level, it should be on a policy level," Braganza said.

Despite all these misgivings, both sides will meet for trade talks next month to firm up a Comprehensive Economic Partnership Agreement or CEPA.

Sudhir says 'secretary level' talks will take place in June in Kandy followed by a business delegation before the year ends.

Both sides have exchanged request lists to open up service sectors, with India wanting professional services, education, energy, tourism, Information Technology, health, transport and logistics opened up.

Sri Lanka is asking for greater flexibility in retail trade, shipping, tourism, aviation and a bigger slice of the Indian banking business under financial services.

Thorny issued like Sri Lankan exports of edible oil Vanaspati and pepper will be in the spotlight of talks, with India asking for stronger controls to prevent flooding its market.