"The FTA alone cannot be blamed for the lop sided trade," he told a seminar on bilateral trade held alongside the 'India Show' trade exhibition and investment forum that began in Colombo Friday.
"The imbalance would have been greater if the FTA was not there."
The forum, organised by the Confederation of Indian Industry in partnership with the Ceylon Chamber of Commerce from 3-5 August, 2012, aims to encourage trade and investment between the two countries.
Bilateral trade between Sri Lanka and India reached almost five billion US dollars in 2011 with India buying about 500 million US dollars of Sri Lankan goods and Sri Lanka buying the rest from India.
India’s exports to Sri Lanka have been rising faster than Sri Lanka's exports to India, creating a 3,828 million dollar balance of trade in favour of India.
Sri Lanka's huge trade deficit with India and problems encountered by exporters trying to penetrate the Indian market led to opposition from protectionist professional and industrial forces to the FTA, which has removed or reduced import tariffs to encourage bilateral trade,
They have stalled efforts to expand the FTA into a comprehensive economic partnership arrangement (CEPA) that includes trade in services and investment.
Kelegama said the import-dependent island is bound to have a deficit with India especially since it is a major supplier of imports to Sri Lanka.
But he noted that most Indian imports into Sri Lanka fall outside the free trade deal as they are included in the FTA's 'negative list' in which the island gives no tariff concessions."Only 13 percent of Indian imports come through the FTA. So with regard to the trade deficit, the FTA has acted as stabiliser . . . of bringing some sort of balance.
While Sri Lanka's overall trade deficit with India is large, the deficit is marginal in FTA trade only, Kelegama said.
"No bilateral agreement is free from problems," he noted. "Despite the FTA's shortcomings Sri Lanka is India's largest trade partner in the south Asian region while India in turn is Sri Lanka's largest trade partner worldwide."
Companies from both countries have also undertaken investments in each other.
Approvals for cumulative investments by Indian companies in Sri Lanka have grown to over 700 million US dollars since 2003. India is now the second largest investors in the island.
"This shows that after the FTA Indian investments in Sri Lanka increased," Kelegama said.
Sri Lankan companies were now exporting more value-added products to India and problems encountered in shipments were being addressed, he added.
"We see a gradual movement towards more value added exports."
Non-tariff barriers like red tape, quotas, rules of origin requirements and inspection and quality standards were being dealt with through bilateral talks on a continuous basis.
Kelagama said it was important to go beyond the FTA and further stimulate investment and liberalise the services sector, which account for over half of economic activity in both India and Sri Lanka.
"It is in that context we're negotiating the CEPA. But there are some concerns by Sri Lankan businesses, particularly the threat to the domestic market and the drawbacks in the FTA which they say need to be addressed first before embarking on the CEPA.
"But one can argue that most threats to the domestic market are misplaced and that the CEPA is actually a meeting point to address these draw backs, such as on non-tariff barriers. The CEPA takes into account the asymmetry between the two counties," Kelegama said.
"But time is running out. India is signing FTAs with othe countries. So it's time to deepen our economic relationship."