India embraces Singapore
Asia Times Online
South Asia Jun 23, 2005

In a major step, the Indian cabinet this week cleared the Comprehensive Economic Cooperation Agreement (CECA) with Singapore - a four-part agreement including a free trade agreement, a bilateral investment promotion treaty, an improved double taxation avoidance agreement and an air services agreement. Indian Prime Minister Manmohan Singh and his Singaporean counterpart Lee Hsien Loong will ink the agreement next week and it will come into effect from August 1.

As part of the free trade deal, India will scrap its import duties on 506 items from Singapore from August 1. Tariffs on another 2,202 items will be eliminated in phases by 2009, while tariffs on 2,407 items will be cut over the next four years. Singapore, for its part, will allow duty-free entry of all products made in India except tobacco and cars. The items on which India has agreed to eliminate or reduce tariff cover around 80% of the goods India currently imports from Singapore. Apart from these, India has reserved a list of 6,551 items on which there will be no concession.

"This is a path-breaking agreement for India," said Indian Commerce and Industries Minister Kamal Nath while announcing the cabinet decision. He made it clear the pact has stringent rules of origin for goods, which means that only goods manufactured in India and Singapore can avail the benefits of CECA. A minimum value addition of 40% will be imposed on goods originating from other countries. One of the prime worries of Indian industry was that a free trade pact with Singapore would open the floodgates to goods from other countries channeled through the island state.

Singapore is India's largest trading partner in the Association of Southeast Asian Nations (ASEAN) region. India's imports from Singapore in the 2004-2005 financial year totaled US$25.82 billion, comprising mostly electronic goods, organic chemicals and transport equipment. Its exports to Singapore amounted to $37.96 billion, comprising primarily crude and petroleum products, gems and jewelry.

Though India will indeed be swamped with goods from Singapore as a result of the CECA, posing a considerable challenge to domestic manufacturers, it is believed that this will be more than compensated for by the services and investments agreement. This is the first time India is entering into such a bilateral economic integration agreement in services. Singapore has agreed to enter into a mutual recognition agreement (MRA) for architecture, accountancy and medicines, which will allow Indian-trained architects, accountants and doctors to practice in Singapore. These are only three of the 129 Indian degrees that Singapore will henceforth recognize, making these professionals eligible to work in the island state.

"CECA will be helpful in developing supply chains from India since Singapore is a known trading hub. The mutual recognition agreements in goods provided in CECA will increase India's exports especially in areas like milk and milk products and poultry. The liberalization of the services sector can improve efficiency in the economy, while the mutual recognition of education degrees will provide new [opportunities] to Indian professionals. Furthermore, a major gain would be that CECA will substantially increase [Singaporean] investments in India. Already, Singaporean investments in India have increased by about 114% in 2004-05," Nath said while elaborating on the gains from the agreement.

The Indian government expects financial institutional investment to go up 300%, to $5 billion, and foreign direct investment (FDI) to shoot to $2 billion in the first year of the agreement. FDI inflow from Singapore was around $184 million in 2004-05. DBS has already announced it will invest $52 million in developing a joint retail financial services group in India along with Cholamandalam Investments and Finance Company Limited (CIFCL), a part of one of India's largest non-bank financial entities, the Murugappa Group.

Since 9/11, a large chunk of West Asian oil money is believed to have moved from the United States to Singapore in search of investment opportunities in the fast growing Asian economies. With the CECA, India hopes some of this will move to India. Financial services and double-tax avoidance agreements, say observers, will make Singapore a more successful channel of investment than the Mauritius route, as it is a financial hub hosting 7,000 multinationals and 600 financial institutions.

Indian companies will now be able to raise cheaper funds in Singapore by issuing Singapore Depository Receipts (SDRs). Singaporean companies will also be able to issue Indian Depositary Issues in Indian bourses to raise funds. Indian companies have so far been allowed to tap the US markets through American Depository Receipts and European markets through Global Depository Receipts. But both have high costs and stringent compliance rules, making them difficult tools for smaller companies to use. Cheaper SDRs may be more suited to their needs.

Hailing the move, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) said the CECA would lift bilateral trade between India and Singapore to $10 billion by the end of 2005-06, which might further accelerate to $50 billion toward the end of 2010. ASSOCHAM president Mahendra K Sanghi said Singapore's cumulative investment in India, which is around $3 billion, would go up to $5 billion by 2010 and to $10 billion by 2015. The most important areas of Singapore's investment in India would be airports, ports and building of urban infrastructure, said Sanghi, adding that there is potential for joint ventures in the areas of biotechnology, healthcare, food processing, animation, entertainment and tourism. Singapore's cumulative investments in India have been estimated at $1.3 billion as of the end of 2003. Investments have grown by around 60% annually for the last 10 years.

While the CECA provides India a toehold in ASEAN, it opens a market of 1 billion people for Singapore. The island state has already become India's fastest-growing trade partner. While Singapore is India's largest trading partner in South-East Asia, India is Singapore's top trading partner in South Asia. Exports to Singapore recorded a phenomenal growth of 78.6% during 2004-05, while imports into India grew by 23.8% in the same period. The phenomenal rate of growth in recent years is mainly attributed to the excellent economic and political relationship between India and Singapore.

(Copyright 2005 Asia Times Online Ltd.)

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