INDIA, SINGAPORE INK PACT

By Indrajit Basu

KOLKATA - In their first experiment of economic cooperation, Singapore and India formally entered into an agreement this week, with the two respective prime ministers signing a pact that has a mouthful of a name, the Comprehensive Economic Cooperation Agreement (CECA). This formal pact ends a courtship lasting almost a decade, including two years of hard negotiations, which frequently raised doubts about whether the two countries would ever get to sign the CECA at all.

The agreement signed by Indian Prime Minister Manmohan Singh and Singaporean Prime Minister Lee Hsien Loong is the first of sorts for India, in the sense that it is structured as a package of several agreements involving trade in goods, services, investments and economic cooperation in fields such as education, science and technology, air services, and even intellectual property and flow of human resources. "This is not a simple free-trade agreement," said India's Commerce Minister Kamal Nath. "It is an economic cooperation pact; an economic engagement in various facets covering technology, industry and human resources."

Indeed the CECA is hugely different from traditional free-trade agreements (FTAs), particularly the one India signed with Thailand in 2003, which primarily involves the movement of goods. The CECA is remarkable as much for its Double Taxation Avoidance Agreement - similar to the DTAA India has with Mauritius - as for its trade-related clauses as well as for the sops it gives to the financial sectors of both countries. Under the DTAA, India and Singapore have agreed to lower the withholding tax on royalties and fees for technical services, and Singapore has agreed to exempt its own foreign institutional investors (FIIs) from capital gains tax on income from the sale of shares in India.

The DTAA thus carries two benefits: one that helps Indian software companies selling in Singapore gain from a 5% reduction in tax liability (such companies gain from a drop in the withholding tax on royalties and fees for technical services from 15% to 10% that the revised DTAA provides); and Singapore becomes a preferred destination for financial investors. Until now, FIIs were using Mauritius (for equity investments) and Cyprus (for debt investments) for avoiding taxes on Indian investments, since these two countries' DTAAs with India were the most attractive for FIIs. Following the CECA, experts say, the routing of FII funds could shift significantly from Mauritius and Cyprus, since Singapore is already a hub for many of the FIIs active in India. However, the maximum gains of the financial sectors of both countries do not quite lie in the DTAA.

The CECA gives Singaporean banks unrestricted access to the Indian market if they set up full subsidiaries, and, as a quid pro quo, gives Indian banks full banking status in Singapore. Already three Singapore banks - DBS Holdings Ltd, Overseas Chinese Banking Corporation and United Overseas Bank - have been allowed to establish 15 branches within four years and start an insurance company each, provided none of them hold more than 26% equity. "In the same way that India has given access to Singapore banks, Singapore too will open up its banking system to Indian banks. Indian banks would be able to set up in Singapore qualified financial banks and enjoy the same benefits of a local bank," said George Yeo, Singapore's trade minister.

As part of the deal, India has also allowed the two Singapore state-owned investment companies, Temasek and Singapore Government Investment Company (GIC), to invest up to 20% in listed Indian companies. Individually, however, their investments cannot exceed 10% in a company. India has also committed to allowing Singapore-based entities a 49% stake in local telecom companies and a 74% stake in Internet-related sectors. Similarly, Singapore has permitted Indian mutual funds - based either in India or Singapore - to invest $250 million in equities and other instruments in the Singapore Stock Exchange (SSE). This means that now each Indian mutual fund can invest up to $250 million in SSE-listed investment instruments versus the cap of $1 billion.

Small wonder then both India and Singapore feel large chunks of money to flow between the two countries. "Prime Minister Lee told me that after CECA, one can expect a larger flow of investments from Singapore and through Singapore," said India's Finance Minister P Chidambaram. "Singapore offers a large basket of financial services which can be leveraged to channel investment to India."

According to India's industry lobbies such as FICCI (Federation of Indian Chambers of Commerce and Industry) and ASSOCHAM (The Associated Chambers of Commerce and Industry of India), Singapore's cumulative investment in India, which is around $3 billion, is expected to go up to $5 billion by 2010 and to $10 billion by 2015. But the deal is equally important for Singapore, which will derive maximum benefits from the implementation of tariff concessions on goods by India and from the flow of qualified Indian professionals to power its own economy.

The CECA mandates that India, from August 1, scrap customs duties on 506 products imported from Singapore, while duties on 2,202 product lines will be reduced to zero by April 1, 2009, and duties of another 2,407 products will be reduce by 50% by the same date. According to FICCI, the initial list of 506 includes a plethora of products from the electronic, electrical, instrumentation, pharmaceutical and publishing industries, which form 80% of India's current imports from Singapore.

This tariff-less access to Indian markets would be the biggest gain for Singapore, said Prime Minister Lee, adding that Singapore had also offered entry of all products made in India at zero duty, which will help developing supply chains from India since Singapore is a trading hub. According to the two countries, this clause would ramp up India-Singapore bilateral trade to $10 billion by the end of this fiscal and to $50 billion by 2010.

Two-way trade between the countries was $7 billion in 2004-05, with a reported trade surplus of $1.2 billion in favor of India. The other significant aspect of the CECA is that the two countries have agreed to ease visa restrictions on 127 categories of professionals and would recognize the degrees of their respective universities and technical educational institutions. "There is a feeling that this easing benefits India more than Singapore," said an analyst with the industry lobby FICCI. "But while it is true that Indian professionals would benefit from this clause, it is also true that perhaps our professionals would be of greater help to Singapore to power its growing economy."

Industry sources say this helps information technology professionals, apart from zoologists, botanists, surveyors, pharmacists and the like as well as service industry professionals like those from the advertising and tourism sectors and accountants to take up jobs in Singapore (the only notable exclusion is journalists), who were earlier denied jobs due to a few salary benchmark norms that the CECA now removes. Despite its widespread benefits, however, not everyone is happy. And the manufacturing sector in India is suffering from the old fear that the CECA could be yet another vehicle for cheap Chinese-made products to swamp the local markets. "It cannot be denied that some manufacturing sectors in India may initially take a hit," said T K Bhaumick, a policy adviser at the industry lobby CII (Confederation of Indian Industry). But, he added, "the important thing here is, India is expected to gain from other sectors (such as services, foreign direct investment and FII flows) that could compensate for whatever losses the country has to suffer in manufactured products."

Commerce Minister Nath, however, assures the treaty has built-in safeguards such as strict rules of origin norms - that mandate a minimum value addition of 40%, which would discourage swamping of cheap Chinese products in India. There is also a negative list of over 6,500 "sensitive items" that do not come under any tariff reduction commitment. But even as the protectionists debate the strength of these safeguards, nobody denies that the CECA is of huge strategic importance to the country.

Singapore is a dominant player in the ASEAN (Association of Southeast Asian Nations) region and India has been pushing to get more integrated with ASEAN for some time now, with limited success, as is evident from the Indo-ASEAN free-trade agreement negotiations that have not made much progress. With the CECA, "India is now firmly anchored in the ASEAN region through its presence in Singapore," said Lee. And India is hoping that this presence will act as an impetus to Singh's "Look East" policy, and make the CECA a model for other regional trade agreements.

Indrajit Basu is a Kolkata-based equity-analyst-turned-journalist with more than 12 years of experience in business/finance and technology journalism. Besides writing for HNN, he also writes for US-based publications, as well as IT companies.