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Context
India’s approach towards FTAs is now focusing more on gaining meaningful market access and facilitating the Indian industry’s integration into global value chains. As Union Minister of Commerce and Industry Piyush Goyal has repeatedly emphasized, India would no longer be signing trade agreements just to join a group, but the new approach of FTA negotiations would respond to the need of new emerging dynamics in international trade and the Indian economy.
What is a Free Trade Agreement (FTA)?
It is an arrangement between two or more countries under which they agree to end tariffs and non-tariff barriers on a large value of imports from partner countries.
Coverage: The agreement may also cover, among others, services, investment, and economic cooperation.
- FTA normally covers trade in goods (such as agricultural or industrial products) or trade in services (such as banking, construction, trading etc.).
- FTA can also cover other areas such as intellectual property rights (IPRs), investment, government procurement and competition policy, etc.
Main focus: The focus of an FTA is primarily on economic benefits and encouraging trade between the countries by making it more efficient and profitable. But FTAs may also have political, or strategic benefits.
India’s revamped FTA strategy
- Gaining meaningful market access: India’s approach towards FTAs is now focusing more on gaining meaningful market access and facilitating Indian industry’s integration into global value chains.
- Under the revamped FTA strategy, the Government of India has prioritised at least six countries or regions to deal with, in which the United Arab Emirates (UAE) figures at the top of the list for an early harvest deal.
- The others are the United Kingdom, the European Union, Australia, Canada, Israel and a group of countries in the Gulf Cooperation Council (GCC).
- The early harvest deal is to be enlarged into a comprehensive FTA in due course of time.
Why does the FTA with UAE matter?
- Important economic hub: The UAE has emerged as an important economic hub not just within the context of the Middle East/West Asia, but also globally.
- Strategic location: The UAE, due to its strategic location, has emerged as an important economic centre in the world.
- Although the UAE has diversified its economy, ‘the hydrocarbon sector remains very important followed by services and manufacturing.
- Within services, financial services, wholesale and retail trade, and real estate and business services are the main contributors.
- As part of the GCC, the UAE has strong economic ties with Saudi Arabia, Kuwait, Bahrain, and Oman, meaning the UAE shares a common market and a customs union with these nations.
- Under the Greater Arab Free Trade Area (GAFTA) Agreement, the UAE has free trade access to Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, Jordan, Egypt, Iraq, Lebanon, Morocco, Tunisia, Palestine, Syria, Libya, and Yemen.
India-UAE Bilateral Relations
- The relation has greatly flourished especially after the accession of H. H. Sheikh Zayed Bin Sultan Al Nahyan, as the ruler of Abu Dhabi in 1966, and subsequently with the creation of UAE federation in 1971.
- The greater push has been achieved in bilateral relations when the visit of India’s Prime Minister to the UAE in August 2015 marked the beginning of a new strategic partnership between the two countries.
- Further, during the visit of the Crown Prince of Abu Dhabi to India in January 2017 as the chief guest at India’s Republic Day celebrations, it was agreed that bilateral relations were to be upgraded to a comprehensive strategic partnership.
- This gave momentum to launching negotiations for an India-UAE comprehensive economic partnership agreement.
- Indian Diaspora in UAE: Around 3 million Indians are living harmoniously in the UAE.
- UAE – A willing partner: As India seeks to enhance economic engagement and deepen security cooperation with the Gulf, it finds a willing partner in the UAE.
- India being a natural partner: As UAE ‘Look[s] East’ to find partners for its economic growth and with security concerns emanating from turmoil in West Asia and growing threat from terrorism, it finds a natural partner in India.
- UAE has a special place due to its business-friendly atmosphere, willingness to invest in the Indian economy and its important role in maintaining peace and stability in the region.
- India’s West Asia policy: The UAE occupies a key place in India’s West Asia policy. The high-level visit from both sides has given a new impetus to this partnership.
- In 2017 the two sides signed the agreement on Comprehensive Strategic Partnership (CSP).
Why UAE is tilting towards India?
- Geopolitical conditions as Iran is threatening continuously to close the Strait of Hormuz in case there is a conflict with Saudi Arabia or US. This will adversely affect UAE as well.
- Failure of Pakistan to meet expectations: UAE saw Pakistan as a partner and incorporated a deep economic and security relationship with it. But in the present day, Pakistan does not seem to be of much help to UAE.
- Already facing internal issues, Pakistan failed to come to the aid of Saudi Arabia in its war against Iran-backed rebels in Yemen and has been unable to curb jihadists operating from its land across West Asia.
- India is an important destination for oil and energy purchase as the US is on the way of becoming hydrocarbon independent.
- UAE’s massive sovereign wealth funds can act as a great resource in the development of infrastructure in India.
- Issue of Terrorism: There has been a rising convergence between India and UAE on the terror issue and both the countries talked of the need to combat terror groups without any discrimination.
- Recently,five UAE diplomats were killed in an attack in Kandahar in Afghanistan.
- Violent conflicts around without any resolutions: Countries like Syria, Iraq, Libya and Yemen are suffering from violent conflicts. The Gulf Cooperation Council (GCC) has not produced expected results.
What is the Economic Significance of the UAE?
- The UAE has emerged as an important economic hub not just within the context of the Middle East/West Asia, but alsoglobally.
- The UAE, due to its strategic location, has emerged as an important economic centre in the world.
- In recent years, the UAE, through its ‘Vision 2021’, has sought to diversify its economy and reduce its dependency on oil.
- Since 2012, growth has been led, according to a World Trade Organisation document, by the non-hydrocarbon sectors reflecting the successful diversification of the economy.
- Although the UAE has diversified its economy, the hydrocarbon sector remains very important followed by services and manufacturing.
- Within services, financial services, wholesale and retail trade, and real estate and business services are the main contributors.
India-UAE trade and investment ties
- Trade and commerce forms the backbone of the bilateral relations. UAE has been one of India’s leading sources of FDIs. India and the UAE established diplomatic relations in 1972.
- The India-UAE total trade merchandise has been valued at U.S.$52.76 billion for the first nine months of the fiscal year 2021-22, making UAE India’s third largest trade partner after China and the United States.
- The UAE accounts for 8 percent of India’s oil imports and was fifth largest supplier of crude oil to India.
- As India and the UAE strive to further deepen trade and investment ties, the soon-to-be-announced early harvest agreement comes at the most opportune time.
- The aim is to boost bilateral merchandise trade to above U.S.$100 billion and services trade to U.S.$15 billion in five years.
- Attractive export market: As we are witnessing a big turnaround in manufacturing, the UAE would be an attractive export market for Indian electronics, automobiles, and other engineering products.
- Ninth biggest investor: The UAE’s investment in India is estimated to be around U.S.$11.67 billion, which makes it the ninth biggest investor in India.
- On the other hand, many Indian companies have set up manufacturing units either as joint ventures or in Special Economic Zones for cement, building materials, textiles, engineering products, consumer electronics, etc.
Advanced Technology and the Knowledge Economy
- In 2018, in an effort to keep pace with the changing technological imperative to attain their national aspirations, India and UAE signed a MoU to generate an estimated $20 billion in the span of a decade.
- The Emirates have stepped up efforts to invest in the development of the knowledge economy by expanding “golden visa” residency permits in order to attract the best minds to the country so as to fuel the knowledge economy.
- These ten-year visas are granted to doctors, engineers, PhD scholars and specialists in high-end technology fields such as artificial intelligence (AI), Big Data, virology and epidemiology.
Space Cooperation
- Space is a new arena in which India and the UAE have collaborated through the work of the UAE Space Agency (UAESA) and the Indian Space Research Organization (ISRO).
- Space cooperation between India and the UAE gained quick momentum during Prime Minister Modi’s visit to the Emirates in 2015.
- Together, the two space agencies have developed the nano-satellite, Nayif-1, which was launched from the Satish Dhavan Space Centre, Sriharikota in India.
- The two countries are likely to work together on Emirates’ ‘Red planet Mission’.
Security and Defence Cooperation
- Another significant pillar of India-UAE ties is reflected in their growing cooperation in security and defense sector.
- With the spread of radicalism in Gulf and South Asia, India looks to enhance security cooperation with UAE to counter terrorist threats and combat radicalization.
- ‘Desert Eagle II’, a ten day air combat exercise, was held between the air forces of India and UAE.
What is an Interim Trade Agreement (ITA)?
- An interim or early harvest trade agreement is used to liberalise tariffs on the trade of certain goods between two countries or trading blocs before a comprehensive FTA is concluded.
- Government’s emphasis on interim agreements may be tactical so that a deal may be achieved with minimum commitments and would allow for contentious issues to be resolved later.
- Recently, India and Australia have announced plans to conclude an ITA in March 2022.
- India is also looking to complete an early harvest agreement with the UAE and the UK in the first half of 2022.
Challenges
- The UAE tariff structure is bound with the GCC, and the applied average tariff rate is 5%. Therefore, the scope of addressing Non-Tariff Barriers (NTBs) becomes very important.
- The reflection of NTBs can be seen through Non-Tariff Measures (NTMs) which have mostly been covered by Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT).
- The UAE has 451 SPS notifications.
- Most of the notifications are related to consumer information, labelling, licensing or permit requirements and import monitoring and surveillance requirements.
- These compliances pose a challenge for Indian exporters.
Way Forward
(1) Needs to ensure the execution of the investment projects with the required expertise
- Potential areas to enhance bilateral trade include defence trade, food and agricultural products as well as automobiles. Medical tourism can be an important area where India can attract Emiratis.
- Indian companies with expertise in renewable energy sector can invest in UAE.
- In defence sector, there is a need to further enhance cooperation through joint training programmes.
(2) Manifold Benefits of India-UAE Trade Agreements
- With India’s newfound strength in exports, a trade agreement with an important country such as the UAE would help sustain the growth momentum.
- As we are witnessing a big turnaround in manufacturing, the UAE would be an attractive export market for Indian electronics, automobiles, and other engineering products.
- As both the UAE and India are aggressively pursuing FTAs with several important countries, not only companies from these two countries but also MNCs from other geographies too would find the UAE and India an attractive market to invest in.
(3) Improving the relations with the GCC
- As part of the GCC, the UAE has strong economic ties with Saudi Arabia, Kuwait, Bahrain, and Oman and shares a common market and customs union with these nations.
- Under the Greater Arab Free Trade Area (GAFTA) Agreement, the UAE has free trade access to Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, Jordan, Egypt, Iraq, Lebanon, Morocco, Tunisia, Palestine, Syria, Libya, and Yemen.
- This FTA with the UAE will pave the way for India to enter the UAE’s strategic location, and have relatively easy access to the Africa market and its various trade partners.
- This can help India to become a part of that supply chain especially in handlooms, handicrafts, textiles and pharma.
(4) Solving the issue of UAE’s Non-Tariff Barriers (NTBs)
- The UAE tariff structure is bound with the GCC (applied average tariff rate is 5%), therefore, the scope of addressing Non-Tariff Barriers (NTBs) becomes very important.
- The reflection of NTBs can be seen through Non-Tariff Measures (NTMs) mostly covered by Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT).
- The SPS notifications are mainly related to live poultry, meat, and processed food and the TBT notifications are related to fish, food additives, meat, rubber, electrical machinery, etc.
- The FTA agreement must try to bring more transparency and predictability in the use of NTBs so that their compliance becomes less cumbersome.
Conclusion
India-UAE Relations have become a pivot of India’s Extended Neighborhood and Look West Policy in the region. Shared economic visions and geopolitical outlooks have spurred the two sides to seek to expand cooperation across multiple domains, notably in investment, technology, the knowledge economy, and defense and security. The recently signed India-UAE free trade agreement will enable two-way investment flows and help achieve ambitious export targets.
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