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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 on Wednesday 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 Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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