Swinging east

For nearly a decade now, India and Singapore have been going through the rites of an extended courtship. It is good to see that their devotion to each other has finally ended in a formal engagement, with the approval of the Comprehensive Economic Cooperation Agreement (CECA) between the two, to be effective from August 1.

As a result, 80 per cent of Singapore's exports to India will become duty-free. Its IT companies will be the immediate beneficiaries because India has scrapped tariffs on 506 trade items.

Also, its banks will get unrestricted access to the Indian market if they set up full subsidiaries. The agreement will also give Singapore improved double-taxation avoidance treatment, which means zero capital gains tax for Singapore-based companies.

Until now, only Mauritius enjoyed this privilege. Temasek Holdings and Government of Singapore Investment Corp. are to be allowed to own a combined 20 per cent of Indian companies, which is twice what other global institutions are allowed. Temasek has already invested US $1.5 billion.

Singapore holds vast amounts of dollar reserves and has been investing these abroad in a way that they stay off the balance sheet of its central bank. Investing abroad has been Singapore's alternative to sterilisation.

India's gains are less clear-cut as they are more by way of being strategic in nature. As the commerce minister, Kamal Nath, put it, the deal should be seen as going beyond tariff rates and market access.

It is, above all, an agreement to work together in a variety of areas such as services, technology, investments, education and so on. What it signifies is recognition by the two governments of a long-term mutuality of interests, of which the economic ones might be dominant but are underpinned by other concerns.

In short, India and Singapore have formed a team. India has the market. Singapore has financial muscle. Having found its experience with China not entirely happy, it is willing now to put more of its eggs in the Indian basket. Only some poor handling will mess things up.

Two sorts of protests can be expected: one from multi-lateralists, and the other from protectionists. The former will ask the valid question about whether these kinds of agreements are trade-diverting or trade-enhancing.

The response must be that the agreement must be seen in a larger framework: both Europe and, to a lesser extent, the US have been demonstrating in their various ways that they will put sand in the wheels of multilateralism if that means allowing economic power to drift towards Asia.

The result is an impasse in a host of areas. There is something to be said, therefore, for Asian markets to come together (as they have already been doing""witness the rapid growth if intra-region trade) and to integrate financially (as many have been arguing, so that Asian financial surpluses do not have to be invested in American government securities).

Bilateral and regional agreements help in this integration process. As the new century progresses, the economic centre of the world will move somewhat towards Asia, with Singapore possibly playing the role that London plays, or perhaps Zurich.

As Lee Kuan Yew once put it, to "plug into that grid" makes economic and commercial sense.