In 1994, the then prime minister of Singapore, Goh Chok Tong, spoke of triggering a mild India fever among Singapore’s business community. The sharp upward trajectory of bilateral trade and investment relationship between the two countries suggests that the mild fever has now gone viral. The deepening of India-Singapore commercial ties over the past decade is a matter of both celebration and frustration. It also embodies certain interesting paradoxes.

The defining moment in India-Singapore commercial relations was the launch of negotiations for a comprehensive economic cooperation agreement (CECA) between the two countries in April 2003, followed by its implementation in August 2005. This was India’s first free trade agreement (FTA) which addressed goods, certain sectors of services, investment and intellectual property rights under a single framework. Two-way trade between India and Singapore surged from a low base of $2.4 billion during 2000-03 to a peak of $25 billion in 2011. The trend in trade was also mirrored by inflows of foreign direct investment (FDI) into India from Singapore, which increased from $38 million in 2002-03 to $6 billion in 2013-14. Clearly, commercial relations between the two countries have ascended unprecedented heights in the decade after CECA.

While the ten-fold increase in India’s exports from $1.4 billion in 2002-03 to $17 billion in 2011-12 might represent simultaneous economic expansion in both countries, a deeper analysis provides some interesting insights. India’s share in Singapore’s import basket increased from 1 percent in 2003 to 3.5 percent in 2012. From India’s perspective, the share of Singapore in its export basket shot up to 4.7 percent in 2012 from a modest 2.8 percent in 2003. Not only has the value of India’s exports zoomed over the past decade, the increasing share in Singapore’s import basket suggests that to a certain extent India may even have displaced some of the other competitors in Singapore.

What can explain the significant expansion in India’s exports to Singapore over the past few years? Tariff concessions under CECA cannot be a reason, as Singapore already applied zero customs duty on most of its imports even prior to the CECA. It is worth considering two possible explanations. First, India’s exports to Singapore appear to have taken off in 2003. This coincided with the initiation of CECA negotiations. It is likely that the CECA negotiations created awareness among the business community in the two countries about each other’s potential. Exchange of market information may have been another factor contributing to the surge in trade immediately before, and after, the implementation of CECA.

While the first explanation might appear speculative, the second explanation is grounded in trade data. Over the past decade India’s export structure appears to have changed and become more closely aligned with the products imported by Singapore. Quantitatively, this concept is captured by the trade complementarity index (TCI). Higher the TCI between India (as exporter) and Singapore, better is the ‘fit’ between India’s global exports and import demand in Singapore. India’s TCI with Singapore increased from a low level of 0.08 in the years prior to commencement of CECA negotiations, to 0.4 in 2012.

Unlike the period before CECA, in recent years the products in which India has export capacities are also the products in which significant import demand exists in Singapore. These two reasons can possibly explain the underlying paradox of surge in India’s exports to Singapore, even in the absence of any tariff benefits from CECA.
While India may not have benefited from tariff concessions under CECA, given the high tariffs prevailing in India during 2003, Singapore secured significant tariffs gains in the Indian market. However, if we examine the trends in Singapore’s exports to India, another paradox confronts us. Singapore’s export to India increased seven-fold during 2003-11 and reached $8.3 billion. However, despite benefiting from tariff concessions under CECA, Singapore’s exports in recent years have dipped, touching $6.7 billion in 2013. A possible explanation for this paradox could be the fact that with India implementing FTAs with ASEAN, Malaysia, Japan and Korea, the edge enjoyed by Singapore’s exports in the Indian market may have been eroded.

With bilateral trade between the two countries soaring, there may be much to celebrate. However, certain realities in the trade relationship cannot be ignored. First, despite opportunities being available in Singapore’s market, Indian exporters have been unable to diversify the basket of products exported to Singapore. In many years, just one product group – petroleum oils and oils obtained from bituminous minerals etc – has accounted for more than half of India’s exports to Singapore. Extreme reliance on just one product group makes India’s overall export prospect extremely vulnerable to price shocks and sudden change in demand.

The second source of frustration in bilateral trade ties relates to the issue of compliance with product standards. The CECA provided the possibility of mutual recognition agreements and conformity assessment procedures in a few sectors, including telecommunications equipment, electronics and electronic equipment, and food products. However, on account of a variety of factors, including procedural delays, the full potential of this provision has not been realised. This may have limited the scope of further growth in bilateral trade. 

On the investment side, the stock of FDI equity inflows into India from Singapore during 2000-12 stood at $18.8 billion. As this represents around 9 percent of the stock of global FDI equity inflows into India from all sources, clearly Singapore has become an extremely important source of investments into India. This conclusion is further buttressed by the fact that in certain years the equity inflows from Singapore were 13 percent of global inflows. In addition, the total FDI inflow into India during 2013-14 was almost $6 billion – again, an impressive indicator of deepening commercial links between the two countries.

Almost 30 percent of the FDI equity inflows from Singapore during 2000-12 were in the services sector. Telecom, construction development, petroleum and natural gas and computer software and hardware account for another 30 percent of these inflows.

Singapore’s FDI inflows have facilitated in managing and upgrading certain sectors of India’s weak infrastructure. These include FDI infusion in Gujarat’s Pipavav port and Singtel’s joint collaboration with Bharti Telecom. Further, the Port of Singapore Authority’s contract for the management and operation of Tuticorin port is yet another pointer towards how India is benefiting from commercial ties with Singapore. While some of these projects may have occasionally encountered rough weather, the overall experience points to significant gains for India’s infrastructure.

What does the future hold for India-Singapore commercial ties? As India seeks to revamp its manufacturing sector and strengthen its infrastructure, there are immense opportunities for Singapore to invest in India. Further, with India and Singapore emerging as Asia’s largest refined petroleum product exporters, closer cooperation in this segment could mark a fundamental shift in the configuration of global refining. It would also be in India’s interest to tap into, and benefit from, the emerging status of Singapore as a high-quality Asian hub for education and high-tech research.

Despite the strong presence of Indian diaspora in Singapore, till the turn of the millennium, commercial ties between the two countries were not significant. CECA imparted the initial momentum for the boom in trade relations. The recent buzz created by the Tata group’s joint venture with Singapore Airlines to set up a full-service carrier in India is just one example of what can be achieved if businesses from the two countries collaborate. If the past is an indicator, the ties are set to get elevated to a higher trajectory. Watch out for the merlion and the tiger working together.

Das is the head of the Centre for WTO Studies, Indian Institute of Foreign Trade. Views expressed are personal.

The story appeared in the August 16-31, 2014 issue of the magazine as part of the Singapore-India special edition.