The Hindu Business Line : Beware the diversion

DURING THE STEWARDSHIP of Mr Atal Bihari Vajpayee, major strides were taken to forge an economic link with Singapore that would benefit the Indian economy in the long run. That link was to be given concrete shape under a Comprehensive Economic Cooperation Agreement (CECA) covering five broad areas, the most important being a free trade agreement between the two economies. The other areas were investment promotion, double-taxation, civil aviation, and specific work programmes on economic cooperation. According to the earlier schedule, the FTA was to be signed in April. However, the CECA applecart was rocked by the Lok Sabha elections and its future has become somewhat uncertain with the present Commerce Minister, Mr Kamal Nath, telling the visiting Singapore Prime Minister, Mr Goh Chok Tong, last week that had it not been for the visit he would probably not "have even opened the document".

Significantly, as opposed to the unstinted support that Mr Vajpayee and his Ministers such as Mr Arun Shourie and Mr Arun Jaitley gave the project, the response of the new Prime Minister, Dr Manmohan Singh, has been more measured. Dr Manmohan Singh is reported to have told Mr Goh that he "philosophically (supported) FTA-plus" but that the UPA Government was a coalition regime and he had "to persuade the others to come along". While the the National Common Minimum Programme's silence on FTAs could mean a smooth road ahead for the Singapore venture, its support for trade liberalisation measures specifically within the WTO negotiating framework (and that too only if the interests of farmers are protected), could spell danger for FTAs because of their regional character. It will be argued that the Singapore FTA will pose no threat on the agriculture front as the island-nation is not a major producer of farm products. Indeed, on a larger scale, as Mr Goh emphasised, Singapore can pose no economic threat to India whatsoever. Yet, the fact remains that Singapore is primarily an entrepot, and other countries can route their exports to India via the city-state's free-trade window, which could pose a threat to Indian interests. Happily, Singapore is conscious of this, which is why Mr Goh stressed on the rules of origin under which any third economy company would have to add value up to "35 to 40 per cent" to their products in Singapore before they can use the FTA channel to export to India.

Trade diversion is the most important issue in the framing of the FTA and New Delhi must leave no room for that. In fact, Singapore has reportedly sought the removal on a fast-track basis of import duties on some 2,400 items (including farm goods, engineering products and pharmaceuticals items) that it is not known to produce. Obviously, these are all re-exports, and India must ascertain that the rules of origin guidelines are followed. Further, Singapore has reportedly asked for rules of origin treatment for products of its joint venture firms operating in other Asean economies. This means an extension of the FTA and could open a Pandora's box. For India an FTA-plus arrangement with Singapore would be a major stepping-stone towards closer economic integration with Asean — certainly worth pursuing but only after safeguards against trade diversion are put in place.

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