India and Malaysia share a long history of economic and cultural relations. Over the past decades, mounting interest has been expressed in the contemporary bilateral relations between the two countries. Malaysia has one of the largest concentrations of Persons of Indian Origin (PIO) living outside the Indian sub-continent. In a meeting with the Indian community during his visit to Malaysia in December 2005 the Indian Prime Minister Manmohan Singh said: ?It is not numbers alone that make you so special. You have, for generations, kept the spirit and the idea of India alive in this home away from home. I commend you for it. I salute you.? Built on the commendable contribution of PIO, today?s engagement between the two countries promises huge benefits.

The rise of India and Malaysia are the great hope of Asia?s growth. Services trade between the two countries is perhaps the best example of the growing internationalisation of economic activity and its correlates, the growth in the flows of capital and labour across borders. Malaysia is the country in the Asean region with which India enjoys comparative advantage in services trade. In fact, according to an unofficial RBI estimate, India?s services export to Malaysia ($2.76 billion) outstripped her merchandise export ($1.21 billion) to that country in 2006.

However, India has a persistent unfavourable balance of payment with Malaysia in merchandise trade for a long time. Except the year 1993 when India witnessed a mere $5 million merchandise trade surplus with Malaysia, the merchandise trade deficit increased from less than $200 million in 1991 to about $4.43 billion in 2006. The rise in trade deficit is mostly fuelled by India?s import of petroleum oil from Malaysia, increased to $2298.27 million in 2006 from about $3 million in 2001-02. India also imports a good amount of palm oil from Malaysia ($199 million in 2006), decreased from $401 million in 2001-02. If one excludes crude oil, merchandise trade volume between India and Malaysia is moving away from traditional raw materials to intermediate and finished products leading towards a vertically integrated production network, at least in electrical and electronics in the very short run.

Nevertheless, the imports are still limited to a narrow range of products. At the same time, some items like P-Xylene ($ 138.07 million), Anhydrous Ammonia ($ 57.65 million), wooden furniture, automotive products, iron and steel products, office and telecom equipment, computer and peripherals have seen rapid rise in India?s imports from Malaysia in recent years.

Both the countries are fairly open to each other?s trade in goods. While 79.3% of Malaysia?s imports from India are subject to zero duty, about 78.7% of India?s imports from Malaysia are subjected to duties of up to 5%. The bilateral merchandise trade between India and Malaysia are well below the potential. But, the question remains whether present trade volume between the two countries can enlarge in near term when tariffs have already been reduced to a lower level.

In contrast, services exports from India to Malaysia have expanded substantially in the last decade-and-a-half, particularly after the Asian financial crisis. Malaysia?s high rate of growth sustained over the past decade has attracted Indian IT firms to invest in Malaysia. Presently, about 67 Indian IT firms including giants like HCL, Satyam, NIIT have established their units in Malaysia?s Multimedia Super-Corridor (MSC) project.

Education is an area that offers immense potential. As noted in India-Malaysia Joint Study Group (JSG) report, there were about 1,163 Indian students studying in public and private higher education institutions in Malaysia in 2006, while it was estimated that there were about 3,000 registered Malaysian students studying in India in the same year.

A significant proportion of practicing doctors in Malaysia have obtained professional degrees from Indian universities. During 1970s and 1980s, a good number of Malaysian students used to study medical science in India. In fact, a complete floor of the RG Kar Medical College hostel equipped with modern facilities in Kolkata was built from a grant from the Malaysian government in order to accommodate Malaysian students studying medical courses in Kolkata in late 1970s. However, since mid-1980s, this trend reversed. In recent years, there have been several joint ventures in education such as between Melaka and Manipal medical colleges. In 2005, Vinayaka Mission?s Research Foundation, a Deemed University in Salem in Tamil Nadu, has established twinning arrangements with Penang International Dental College (PIDC). We need to enhance the educational collaboration between the two countries.

Tourism is another area, which holds high promise. The flow of tourists between the two countries is also growing rapidly. India is a major source of tourists for Malaysia, which, on the other hand, received about 2,25,789 visitors from India in 2006. To further cooperation, India and Malaysia, which have strong complementarities in services, can be explored through sectoral-level collaboration.

India and Malaysia are planning to execute the Comprehensive Economic Cooperation Agreement (CECA) by the turn of this year. The success of CECA would however depend on how both the countries agree to each other?s financial services liberalisation programmes, where a large number of issues are yet to be resolved.

Malaysian firms are actively investing in India, particularly in infrastructure sector. One good example is the JV between GMR Infrastructure and Malaysia Airports that has recently constructed a new airport in Hyderabad. Malaysian companies have been associated with NHAI?s Golden Quadrilateral projects. Given the recent upsurge of outward FDI from India and Malaysia, their investments to each other have been very low.

During the period April 2000 to March 2008, Malaysian companies have invested only $125 million in India. This cumulative FDI does not include the investment of Malaysian company Maxis in Aircel Telecom in India. On the other hand, Indian companies have invested about $570 million in Malaysia till 2007. Starting with Godrej in late 1960s, today there are 61 Indian joint ventures in sectors ranging from palm oil refining, power, railways, civil construction, education, and information technology.

Although the FDI flows between the two countries witnessed major setbacks in the past due to mainly mistrust, the future is rather promising, provided both countries liberalise their investment regimes.

Malaysia has transformed from a traditional economy in the early 1980s into a modern industrialised economy in late 1990s. Thecontribution of the Indian community in the economic growth of Malaysia is commendable. Migration of unskilled labour from India during the colonial period provided the foundation of modern Malaysia.

In today?s world, both the countries are increasingly looking towards knowledge-based and high technology industries to fuel its future growth and expansion. A more liberal services-trade environment would then help each other in accessing skilled professionals, which could drive the economic relations to a higher level. Similarities and contrasts between the two countries will generate dynamism in the bilateral relationship and build lasting partnership.

?The author is a fellow at Research & Information System for Developing Countries, New Delhi. These are his personal views