Strengthening Trade Ties: Key Sectors Driving Growth In India – UAE Bilateral Trade

DR. Monica B. Sood

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Data shows that non-oil trade between India and the UAE expanded last year. I would like to understand some of the factors that might be driving this growth?

The significant expansion in non-oil trade between India and the UAE over the past year can be attributed to several factors. Firstly, the bilateral trade between the two nations reached historic highs during FY 2022-23, increasing from US$ 72.9 billion to US$ 84.5 billion, marking a remarkable year-on-year growth of 16%. This surge underscores the strengthening economic relations between India and the UAE.

Furthermore, ongoing discussions between the United Arab Emirates and India aimed at enhancing non-oil commerce, particularly in rupees, indicate a mutual commitment to deepening trade ties. This initiative reflects the Gulf country's efforts to bolster its partnership with India, its second-largest trade partner.

Additionally, the Comprehensive Economic Partnership Agreement (CEPA) between the two nations plays a crucial role in fostering trade expansion. By providing duty-free access to various labour-intensive sectors such as gems and jewellery, textiles, agricultural products, and pharmaceuticals, among others, the CEPA stimulates the development of new trade avenues and encourages investment and innovation dynamics. This comprehensive agreement serves to intensify bilateral engagement across diverse sectors, contributing to the robust growth of non-oil trade between India and the UAE.

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Which areas in particular does trade between the two countries seem particularly strong?

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The robust trade relationship between India and the UAE is evident in several key areas, demonstrating a particularly strong partnership between the two nations. As India's third-largest trade partner, the UAE plays a crucial role in the bilateral trade landscape, with expectations that trade will surpass USD 60 billion in the current financial year.

One notable aspect of this relationship is India's position as the UAE's number one trading partner for non-oil exports, representing nearly 14% of the UAE's total non-oil exports on a global scale. This highlights the significance of India's contribution to the UAE's export market diversification and economic growth outside the oil sector.

The Comprehensive Economic Partnership Agreement (CEPA) further solidifies the strength of trade between India and the UAE, offering substantial benefits for both parties. With the UAE's commitment to duty elimination on over 97% of its products, covering 99% of Indian exports in value terms, and reciprocal tariff elimination on more than 80% of goods exported to India, the CEPA sets the stage for significant trade expansion.

In terms of specific sectors poised for growth, a wide array of industries stand to benefit from the CEPA. These include business services, telecommunications, construction and development, education, environment, financial services, health services, tourism, hospitality, and maritime and air transport services, among others. The agreement paves the way for enhanced cooperation and investment opportunities across these sectors, facilitating the flow of goods and services between India and the UAE.

Looking ahead, the CEPA is projected to catalyse substantial growth in bilateral trade, with aspirations to surpass USD 100 billion in goods trade and USD 15 billion in services trade within the next five years. Moreover, the agreement serves as a catalyst for small and medium enterprises (SMEs) in both countries, providing them with a platform to expand internationally by accessing new customers, networks, and avenues for collaboration. Overall, the CEPA represents a transformative milestone in the India-UAE trade relationship, ushering in a new era of economic cooperation and mutual prosperity.

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Is UAE-India trade expected to continue to expand, and what are the factors that are likely to drive this trade?

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a.) The outlook for UAE-India trade is highly favourable, with multiple factors poised to drive continued expansion in the coming years. The partnership between the two countries has resulted in collaborative efforts across various fronts, including the economy, climate change, industry, advanced technologies, and conservation initiatives such as Houbara conservation. This collaborative spirit is further reinforced by agreements and Memorandum of Understanding (MoU) covering a wide range of sectors, including low-carbon hydrogen developments, investments, food security, and financial services.

b.) One significant aspect of the trade agreement is its focus on enhancing opportunities for small and medium enterprises (SMEs), which is expected to stimulate job creation within this sector. The UAE's commitment to duty elimination on over 97% of its products, representing 99% of Indian exports by value, ensures a conducive environment for trade growth. Moreover, with nearly 90% of Indian exports to the UAE receiving total tariff elimination from Day 1, starting May 1, 2022, the agreement sets a solid foundation for bilateral trade expansion.

c.) The trade agreement is projected to generate substantial employment opportunities in India, particularly in key sectors such as gems and jewellery, textiles, engineering, pharmaceuticals, and automotive industries. With tariff elimination on more than 80% of goods exported from the UAE to India, both countries stand to benefit from increased trade volumes and economic cooperation.

d.) Furthermore, collaborative initiatives such as the establishment of the first-ever Indian Institute of Technology (IIT) campus outside India in the UAE underscore the deepening partnership between the two nations. Symbolic gestures, such as the inauguration of the BAPS Hindu Mandir, serve as tangible expressions of the growing ties between India and the United Arab Emirates. The warm welcome extended to Prime Minister Modi by UAE minister Sheikh Nahyan bin Mubarak Al Nahyan reflects the strong bond between the two nations, characterized by mutual respect and friendship. Overall, with a conducive trade environment, strategic partnerships, and collaborative initiatives, UAE-India trade is poised for sustained growth and prosperity in the years to come.

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Are there geopolitical risks that could negatively impact trade between the UAE and India? What are these risks?

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Yes, there are geopolitical risks that could potentially impact trade between the UAE and India. Some of these risks include:

a.) Strategic alliances: Changes in strategic alliances and partnerships in the region could affect trade relations between the UAE and India. For instance, if either country forms closer ties with a third party that the other views as a competitor or adversary, it could strain bilateral trade.

b.) Regional conflicts: Any escalation of regional conflicts or tensions in the Middle East or South Asia could disrupt trade routes, increase transportation costs, or lead to economic uncertainties, impacting trade between the UAE and India.

c.) Political instability: Political instability or regime changes in either country could create uncertainty for businesses and investors, affecting trade relations between the UAE and India.

d.) Trade policies: Changes in trade policies, tariffs, or regulations in either country could hinder the flow of goods and services between the UAE and India.

e.) Energy prices: As both countries are significant players in the energy market, fluctuations in oil prices or disruptions in energy supplies could impact trade dynamics between the UAE and India.

f.) Security concerns: Any security threats, including terrorism or piracy, could disrupt trade routes or lead to increased security costs, affecting trade between the UAE and India.

g.) Diplomatic tensions: Any diplomatic tensions or disputes between the UAE and India could spill over into trade relations, leading to trade disruptions or barriers.

Addressing these risks requires proactive diplomacy, robust trade agreements, and diversification of trade routes to mitigate potential disruptions.

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Food inflation has been a challenge for the UAE. Could we see any bans on food exports from India, such as basmati rice, that could have an impact?

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a.) Addressing food inflation concerns, particularly in the UAE, presents a complex challenge with potential implications for global trade dynamics, especially concerning essential commodities like basmati rice. While India annually exports significant quantities of basmati rice to various countries, including the UAE, imposing bans or restrictions on such exports could have far-reaching effects.

b.) India's recent actions, including the ban on white rice exports and imposition of export taxes on parboiled rice, have already disrupted global rice markets, leading to price surges and potential shortages. Such measures, aimed at stabilizing domestic prices, have raised concerns about their impact on international consumers and importing countries, exacerbating inflationary pressures.

c.) While it's conceivable for countries to resort to export bans or restrictions to address domestic food inflation, imposing such measures on essential food items like basmati rice may be less likely due to their widespread consumption and diplomatic implications. Basmati rice holds a significant place in global cuisine and any disruption in its supply could trigger diplomatic tensions and economic repercussions.

d.) To manage food inflation challenges effectively, governments may explore alternative strategies such as tariff adjustments, export quotas, or subsidies to stabilize prices and ensure food security. Additionally, investments in agricultural productivity, supply chain efficiency, and diversification of food sources could help mitigate inflationary pressures without resorting to drastic measures like export bans.

e.) While concerns about food inflation persist, policymakers must carefully weigh the potential adverse effects of export restrictions against the imperative of ensuring food affordability and availability for their populations. Collaborative efforts between exporting and importing nations, coupled with proactive measures to address supply chain vulnerabilities, are essential to navigating the complex dynamics of global food trade while safeguarding food security and economic stability.