The Indo-Singapore Compre-hensive Economic Coop-eration Agreement (CECA), which becomes effective on August 1, 2005, is India’s first broad-based agreement. It covers goods, services, investment, intellectual property rights, and economic cooperation in areas like education, science and technology, air transport services, and intellectual property. The CECA follows on the heels of the recently signed Indo-Thai Free Trade Agreement and is an important step towards fostering economic and political ties between India and Singapore. It is an integral component of India’s Look East Policy. It also fits well within and furthers India’s broader trade and investment liberalization programme.

The agreement has significant implications, particularly in terms of stimulating the already rapidly growing trade and investment ties between the two countries. At present, Singapore is India’s fastest growing trade partner and its largest trading partner in South East Asia, while India is Singapore’s most important trading partner in South Asia. The two-way trade between the two countries was estimated at US$6.4 billion for 2004-05, up from US$2.4 billion in 2000-01. Exports from India to Singapore grew by 79 percent in 2004-05 while imports from Singapore grew by 24 percent. Singapore accounted for about 3 percent of India’s total exports and around 2.6 percent of India’s total imports between 2000-01 and 2004-05 while India accounted for 2.2 percent and 0.9 percent, respectively of Singapore’s total exports and imports over this same period. According to Assocham estimates, bilateral trade between India and Singapore is expected to rise to US$10 billion by the end of 2005-06 and further to US$50 billion by 2010. Investment from Singapore in India has grown at about 60 percent per year over the past 10 years and by 114 percent in 2004-05, partly in anticipation of the CECA. The cumulative investment by Singapore in India is expected to rise from US$3 billion to US$5 billion by 2010 and further to US$10 billion by 2015, the bulk of it being directed to infrastructure development in airports, ports, building, and urban infrastructure.1 The agreement can only help strengthen these growing economic relations.

The implications vary depending on the market access conditions prevailing in each sector, with greater benefits in some sectors than in others and on balance, with greater liberalization being undertaken by India than by Singapore in most areas. But the benefits are clearly mutual. The implications go beyond tariff rates and market access and in some ways are more strategic in nature.

In the case of industrial products, effective August 1, 2005, 80 percent of Singaporean products will get duty free access to the Indian market. India has eliminated duties on 506 tariff lines with immediate effect from the entry into force of the agreement. It has phased in the elimination of duties for another 2,202 lines and has agreed to a reduction of 50 percent for another 2,407 lines by 2009. A negative list of 6,551 tariff lines has been kept, where there will be no concessions. Overall, trade in goods will include exchange of tariff concessions at an 8 digit IRC Harmonised System Code covering 11,666 lines.2 It is worth noting that the items on the early harvest list are mostly IT products, thus mainly benefiting Indian IT companies and aiding the growth of the supply chain from India in the IT sector. While fears have been expressed about the possibility of cheap Chinese products finding their way through Singapore into the Indian market, strict rules of origin, requiring 40 percent value addition and significant transformation of tariff heading, should pre-empt such transhipment.

India already has duty free access for many manufactured products in the Singaporean market. Under the CECA, such market access has become predictable, which will benefit India’s exports of food, poultry and milk products, and textiles and clothing. The benefits for Indian manufacturers are not so much in terms of increased market access, but in terms of greater certainty and predictability of existing market access.

There are also likely benefits due to greater Singaporean investment in manufacturing in the Indian market, given the granting of pre-establishment of national treatment status to manufacturing industries (in addition to other areas like infrastructure, housing, and township development) by India under the CECA. Within the manufacturing sector, India has committed to opening up investment in food products, motor vehicles, textiles, paper and paper products, chemicals, and leather. There is potential for cooperative ventures in areas such as food processing, biotechnology, pharmaceuticals, and electronic and electrical equipment.

But the benefits and the scope for win-win possibilities and synergies are perhaps greatest in the services sector. An examination of the CECA’s key features against the backdrop of existing relations between India and Singapore in services suggests that there are many mutual benefits in the area of services.

The commitments by both countries in services are substantive. They bind and in some cases liberalize existing investment policies and regulations. India has committed in telecommunications, financial, air transport, tourism, accountancy, taxation, architecture, engineering, health, and management consulting services, among others. It has permitted Singapore’s Temasek Holding Pte and Government of Singapore Investment Corporation to own as much as 20% in listed Indian companies compared to 10% permitted by SEBI. It has granted national treatment, i.e. greater operational freedom to three Singapore banks, namely, United Overseas Bank, DBS Holdings, and Overseas Chinese Banking Corporation, in the Indian market, allowing them to be treated at par with Indian banks with regard to opening of branches, operational locations, and prudential requirements. India has thus gone beyond its WTO offers in financial services. It has granted national treatment to Singaporean investments in township and construction development and housing. It has also committed to allowing Singapore based entities a 49% stake in local telecommunications and 74% in Internet related sectors. Singapore based FIIs have been exempt from capital gains tax in India on income derived from sale of shares, which is likely to lead to more FII flows from Singapore into the Indian market and possible routing of such investments through Singapore as opposed to Mauritius and Cyprus. It is expected that FII will rise to US$5 billion in the first year alone of this agreement, with FII investment in infrastructure amounting to US$2 billion. Asset managers in Singapore who offer mutual funds to investors in India will be allowed to invest US$250 million over and above the ceiling of US$1 billion for overseas investment in mutual funds.3

Singapore has, in turn, committed partial or unrestricted access in legal consultancy, market research, telephone answering, retail trading, education, environment, and health services, among others. It has given qualified full banking status to Indian banks operating in Singapore, namely Indian Bank, Bank of India, and State Bank of India, and ICICI to use local ATMs and transfer money electronically, and also bound its current policies on securities transactions, asset management, and insurance to eligible entities from India. It has also reduced the withholding tax on royalties and fees for technical services from 15% to 10%, which will benefit Indian companies providing services to Singapore. Visa restrictions have also been eased for Indian professionals in 127 categories, including IT, medicine, engineering, nursing, accountancy, and university lecturers, among others. Mutual recognition will be granted to degrees issued by specified universities and technical education boards of both countries for issuing multiple entry visas, thus addressing a major regulatory hurdle to cross border mobility of labour. Earlier, professional seeking visas to Singapore were required to demonstrate equivalence of salary with professionals based in Singapore and non-compliance led to denial of visas. Under the CECA, there is now a provision whereby the salaries of Indian professionals will be calculated by including allowances paid in India and Singapore to the basic pay in order to meet the benchmark criterion of equivalent wages, which will enable more professionals to enter the Singaporean market. In addition to easing the movement of Indian professionals to Singapore, the CECA is also likely to boost the outsourcing of service activities from Singapore to India and to spur associated investment by Singapore in India.

Several existing cases of service sector integration between the two countries emphasize the scope for mutual benefit. Some Indian IT companies, like TCS and Satyam have made Singapore their Asia-Pacific hub. Singapore’s ECS Holdings Ltd. plans to enter the Indian IT sector through a local partner. The AEC Education Group of Singapore has formed a joint venture with the Shriram Group of Chennai and Ceylinco of Sri Lanka and set up the Singapore Study Centre in Chennai to facilitate overseas higher education by Indians in Singapore. The Singapore based Stansfield School of Business plans to establish 20 business schools across key cities in India, with an overall investment of Rs. 20 crores. There are joint ventures in health care, such as the Apollo Gleneagles Hospital in Kolkata. The Singapore based Raffles Medical Group is planning marketing initiatives and alliances in India, including discussions with private airlines to develop packages for medical tourists from India to Singapore. Indian healthcare professionals constitute an important part of the medical workforce in Singapore and its goal of becoming a medical tourism hub in the region. There are numerous other cases of synergies, such as the jointly funded US$200 million venture capital fund between Reliance and Temasek in India’s power sector, the collaboration between Tata Indicom-India and Singapore Cable Systems for laying an underwater cable between Chennai and Singapore in telecom services, and Temasek’s equity stake in ICICI OneSource in a bid to enter India’s BPO sector.4

The CECA is likely to further strengthen ties in the service sector between the two countries, through greater interaction of banking systems and financial companies, increased professional cooperation and exchange, investment, movement of visitors, and offshoring of businesses. There are some 1500 Indian companies that are based in Singapore and more than 300 Indian IT companies have already set up software development operations in Singapore. The CECA will result in more Indian companies setting up their operations in Singapore, across a wide range of business activities, including in particular areas like IT, chemicals, and pharmaceuticals. In turn, the more than 7000 MNCs based in Singapore will help Indian corporates to expand their ties with other parts of Asia.

Overall, the CECA will enable both countries to leverage the complementarity in factor endowments. India needs capital, technology, and expertise, which can be provided by Singapore through investment and collaboration in areas like telecommunications, financial, and transport services. Singapore is in search of a large market and also requires manpower to fulfil its potential as a services hub, both of which can be provided by India. There is thus a clear quid pro quo in services, a principle that has also guided India’s multilateral negotiating strategy in the GATS. Perhaps, the CECA could serve as a learning experience for India’s future multilateral efforts in services. It is certainly a stepping stone to India’s prospective FTA with Asean.

Footnotes

• http://www.assocham.prg/prels/show news.php?id=347, posted June 21, 2005.

• http://in.news.yahoo.com/050620/139/5z15h.html, posted June 20, 2005.

• http://www.bsnl.in/business.asp? intNews ID=51206&strDisplay Style=block& intDays Bef, “What is the ndo-Singapore Treaty?”, posted June 24, 2005.

• See, http://www.bridgesingapore.com/bsnews, miscalleneous articles on Indo-Singapore economic relations across different sectors and activities.

(The author is a professor at the Economic and Social Science Area, Indian Institute of Management Bangalore)

--By Prof. Rupa Chanda