Welcome cuts in tariff

With India agreeing to reduce tariffs on 539 manufactured goods from Singapore, the bilateral agreement signed in 2005 takes definitive shape. The Comprehensive Economic Cooperation Agreement (CECA) was meant to strengthen economic ties between the two countries, and Customs tariff reductions acquired a greater urgency when the two agreed last March to double their annual bilateral trade to $32 billion in five years. The reductions now effected by India mark a major milestone towards this goal.

The cuts mutually agreed on are indeed impressive. Tariffs on nearly 307 goods will be eliminated by the end of this year in five equal phases: the sectors include chemicals, base metals, machinery and textile goods. Free access for manufactures of this kind and for others at reduced duty levels from Singapore, India's largest trading and investment partner in the Asean bloc, cuts to the heart of India's traditional manufacturing base and there are sure to be protests from representatives of the industries concerned about the unfairness of the competition. But there are two considerations that opponents to this free access must bear in mind: many of the industries that will be affected — textiles, for instance, or chemicals — need a jolt of this kind to modernise and become more technologically proficient. Like their competitors elsewhere, Indian textile and chemical manufacturers, traditionally labour-intensive, need to use high technology far more to reap productivity gains that lead to competitive prices for quality goods and enable them to acquire and retain larger market share. Indian companies benefit otherwise too: Singapore is the preferred offshore logistics and financial hub for Indian firms looking to expand operations to points further east, with nine Indian banks operating in the city-state. The benefits of the CECA will also extend to end-users of the virtually duty-free imports. Indian industry, particularly in new projects, gridlocked as it is in the vice-like grip of high input costs, will find cheaper imports a boon as they crank up operations in 2011. The attractiveness of Chinese power and telecom equipment is a case in point. Bilateral free-trade agreements, however, carry a sort of moral hazard: the US, for instance, also wants the kind of pre-investment guarantees for its investments that India's agreement with Singapore contains, and the Indo-US bilateral treaty is stuck on this point. Such free trade arrangements, therefore, can become as fractious as multilateral negotiations without the benefit of the WTO's mediation.

Given the poor record of Indian capital goods and the effect on core projects that are often held up because of delays in capital equipment supplies from domestic players, the proposed reductions will certainly prove beneficial.

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