‘Linking West’ in ‘Unsettled Times’: India-G.C.C. Trade Relations

India's interests and capabilities extend well beyond the subcontinent. This essay is part of a series that explores the geopolitical dimensions, economic ties, transnational networks, and other aspects of India's links with the Middle East (West Asia) -- a region that plays a vital role in India's economy and its future. More ...

Since the early 2000s, the value of India’s international trade has increased sharply while relations with both developed and developing countries have become more comprehensive. India has been actively engaging in negotiations with individual countries and regional blocs to diversify trade and expand its export market. The burst of sustained G.D.P. growth that India has experienced during this time has strongly correlated with the growth of trade, and more specifically with increased exports.[1]

In April 2015, Prime Minister Narendra Modi’s government issued its first five-year Foreign Trade Policy (FTP), aiming to expand India’s share of global trade from 2.1 percent to 3.5 percent and double exports (to $900 billion) by 2020.[2] However, the new FTP was announced at a time when the value of India’s merchandise exports had begun to decline. The downward trend continued for 19 consecutive months, due mainly to weak global demand and a poorly diversified export basket.[3] This January, the Modi government initiated a mid-term review of its trade policy,[4] amidst mildly encouraging signs of an uptick in exports though within a generalized climate of global economic uncertainty.

These circumstances provide an opportunity to take stock of the remarkable development of India’s relations with the Gulf Cooperation Council (G.C.C.) countries. Economic and trade relations have been the most dynamic and significant component of the changes that have taken place in these relations since the early 1990s.[5] As a consequence, the Gulf has become of vital strategic importance for India in terms of energy security, trade, investment, and remittances.

This essay discusses the contours of India’s economic and trade relations with the G.C.C. countries, including the contributions they have made to India’s economic ascent and the scope for their further development.

The Changing Global Trade Landscape

Over the past several decades, the structure and patterns of activity within the global economy have undergone profound changes. Developing economies have become a powerful force in international production, trade, and finance. Indeed, the global economic geography has shifted, marked by the increasing economic weight of developing Asian economies.

International trade has been a dynamic component of worldwide economic activity and a driver of economic growth in many developing countries. Both because of and despite the stalemate in the negotiations under the Doha Development Round, developed and developing countries alike have continued to negotiate trade opening. As a result, a “new generation” of trade agreements is emerging alongside the familiar World Trade Organization (W.T.O.) model.[6] These agreements, which are negotiated by various W.T.O. members and comprise an assortment of geographical constellations, paint a picture of a pluralist “multi-hub” trade structure in the making.[7]

One of the features of the “variable geometry” that characterizes the current international trade landscape has been the proliferation of free trade agreements between and among developing countries. This phenomenon reflects, and has reinforced the growth of south-south trade, including trade between different emerging-market regions. Between 2005 and 2015, merchandise trade between developing economies increased from 41 percent to 52 percent of their global trade[8] (see Table 1). Although East Asian countries have played a dominant role in south-south trade, other developing countries are on the way to join the list of top exporters. And India is one of them.

Table 1. Developing economies’ merchandise trade with developing, developed and CIS economies, 2000-2014
Source: Table 6.2, World Trade Organization, “World Trade Statistical Review 2016,” 54.

India’s Evolving Global Trade Profile: The India-G.C.C. Component

India has become a significant player in international trade. Its trade has grown from $9.5 billion in 2000-01 to an average annual figure of $77.8 billion during the period 2011-15. Although total trade contracted in 2015-16, falling to $64.3 billion (a 15 percent drop from the previous year), it is important to note that since 2011 India has traded more with the rest of the world than China.[9]

Collectively, the G.C.C. countries are India’s largest trade partner. Looking at the data represented in Tables 2 and 3 below, it is possible to offer the following general observations:

● Since 2000-01, India-G.C.C. trade has been on a growth trajectory.
● The G.C.C. countries’ share of India’s exports has nearly doubled in the span of a mere decade (2006-2016).
● However, Indian exports to the G.C.C. have fallen over the past two years.
● Nevertheless, the value of India’s exports to the G.C.C. countries in 2015-16 was more than ten times greater than in 2000-01.
● The India-Gulf trade balance is heavily tilted against India, whose export earnings from the G.C.C. are less than half the value of its import bill.
● The value of India’s trade with the U.A.E. has, on a consistent basis, far exceeded that with any other G.C.C. trading partner.

Table 2. India’s imports from the G.C.C. countries ($US millions)

Source: Government of India, Department of Commerce, Import Export Data Bank, updated February 14, 2017.

Table 3. India’s exports from the G.C.C. countries ($US millions)

Source: Government of India, Department of Commerce, Import Export Data Bank, updated February 14, 2017.

It is important to note that exports from India are comparatively more diversified than imports into the country from the region. As Table 4 (below) illustrates, petroleum and petroleum products have consistently accounted for the lion's share of imports from the region.

Two additional points are worth mentioning. The first is that one might assume, incorrectly, that petroleum products flow in a single direction, that is, from the Gulf to India. In fact, India’s robust refining and petrochemical capacity and close proximity to the Gulf have resulted in two-way trade in many of these products. However, with India’s demand for petroleum products increasing, the volume of exports has fallen. So, too, have crude oil and petroleum products prices. Together, these two developments have resulted in a decline in the value of petroleum product exports. In turn, the decrease in petroleum product export revenue has, to some extent, offset the positive short-term effect of low oil prices on India's trade balance. Even as the aggregate value of Indian exports to the G.C.C. countries has climbed over the past 15 years, it has not kept pace with the growth of imports from the region. Consequently, India's trade deficit with the region, as depicted in Table 5, has not narrowed.    

A second noteworthy point is that India has a comparative advantage over the G.C.C. countries in the services sector. As the members of the G.C.C. diversify their economies beyond oil and gas, their demand for services are likely to increase, providing India with the opportunity to capitalize on its low-cost skilled labor and English-language proficiency.

Table 4. Petroleum as a share of India's imports from the G.C.C. countries ($US millions)

Source: U.N. Comtrade database, https://comtrade.un.org/data/.

Table 5. India's trade balance with the G.C.C. countries ($US millions)

Source: Government of India, Department of Commerce, Import Export Data Bank, updated February 14, 2017.

A third point, namely the development and importance of the India-U.A.E. relationship, deserves more extensive treatment.[10] The U.A.E. is India’s largest commercial partner in the region.[11] Owing partly to its status as the gateway to regional and international markets, the U.A.E. is India’s largest export destination in the region and its second-largest worldwide.[12]

The U.A.E. is also India’s largest source of investment from the Arab world and its 11th largest foreign investor.[13] The Emirates have been pumping money mainly into five sectors: construction, power, metallurgy, services, and computer software and hardware.[14] U.A.E.’s proposal to make a $75 billion commitment to the India infrastructure sector is currently under review.[15]

A number of major Emirati companies have made strong inroads in the Indian economy. DP World, which is one of the oldest companies operating in India, runs 34 percent of all Indian container terminals.[16] Other major companies include Abu Dhabi’s National Petroleum Construction Company (NPCC), which is engaged in a project to build offshore platforms from India’s Oil and Natural Gas Corporation (ONGC), as well as the Dubai-based private equity firm Abraaj Group, contractor Drake and Scull International, and KEF Holdings.[17] Beginning April 1, 2017, five-year multiple-entry business visas to India were made available to Emirati citizens and residents.

Meanwhile, India has established a strong footprint in the Emirates. Non-Resident Indians (N.R.I.'s) constitute the largest expatriate community in the U.A.E., and India has emerged as the third largest investor there, led by companies such as L&T, Punj Lloyd, Hinduja Group, Pioneer Cement, and the Oberoi Hotels Group.[18] Dubai’s Jebel Ali Free Zone (JAFZA) hosts more than 800 leading Indian multinational companies in diverse sectors.[19]

Since Shaikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi’s initial visit to New Delhi in February 2016, which was preceded by Prime Minister Modi’s trip to the U.A.E. six months earlier, the two countries have elevated their relationship to a Comprehensive Strategic Partnership, aiming to advance cooperation across a wide spectrum of sectors ranging from trade and investment to defense, security, space, and agriculture.[20] This progress appears to indicate that the two parties have managed to find a way to overcome, or at least work around, a key stumbling block, namely the U.A.E.’s close business and political links with Pakistan. Importantly, there are some indications that India and the U.A.E. hope to leverage their relationship for the purpose of bringing the India-G.C.C. free trade agreement to fruition.[21]

Towards an India-G.C.C. Free Trade Agreement (FTA)?

Over the past two decades, India has concluded ten free trade agreements, while over two dozen more are in negotiation. Under the Modi government, India is making a strong push to deepen its trade ties and boost exports. Accordingly, India is engaged in negotiations on various trade pacts, including the 16-nation Regional Comprehensive Economic Partnership (RCEP). A draft report of a joint study group established to explore a trade deal between India and the Eurasian Union is expected soon to be released.[22] It is in this context that India has sought to revitalize and bring to an early conclusion an FTA with the G.C.C.[23]

India and the G.C.C. signed the Framework Agreement on Economic Cooperation in August 2004.[24] Since then, they have held two rounds of negotiations. Talks proceeded with the expectation of covering trade in goods, service, and investment. In a September 2015 meeting with her G.C.C. Arab counterparts, External Affairs Minister Shushma Swaraj referred to the Gulf as “an extended part of our neighbourhood,” called for early finalization of the India-G.C.C. Free Trade Agreement, operationalizing of the Framework Agreement, and extended an open invitation for the Gulf Arab countries to participate in the Modi government’s “Make in India” campaign.[25]

The case for the conclusion of a free trade agreement is strong. It is expected to reduce tariffs and duties, extend existing trade frameworks, and lead to more intensive economic engagement. There is a large market in the Gulf countries for both industrial and agricultural products from India. The non-diversified industrial base in the G.C.C. offers trade complementarities between India and the G.C.C., which could yield increased trade. Additionally, an FTA could prove helpful in providing opportunities for the fast-growing micro, small, and medium-sized enterprises (MSMEs) both in the Gulf countries and in India.[26] Besides helping boost trade, an agreement could also provide G.C.C. investors greater access to Indian markets.

However, no exact timeline for implementation of the agreement has been set. Policy consensus on both sides has been wanting. Structural barriers, including higher duties on G.C.C. exports to India than the other way around, have hampered progress. So, too, have intellectual property rights (IPR) and cost compliance concerns. Overcoming opposition from India’s petrochemicals and plastics industry — a powerful lobby[27] that demanded some protective tariffs to be maintained — proved to be a formidable hurdle in the initial bilateral talks. Their fear now, as then, is that a free trade deal would expose them to a surge of cheap imports from the Gulf’s growing refining and petrochemicals sector, as well as add to the country’s trade deficit.[28] Another roadblock has been India’s import duty on petroleum, whose elimination would be problematic given the large share of customs revenue that it represents.

Neither is the path toward a rapid conclusion of the FTA free of obstacles on the other side. The G.C.C. adopted a uniform trade policy in late 2005 during its annual summit in Abu Dhabi. The policy stipulates collective bargaining with other countries and economic blocs. Nevertheless, the G.C.C.’s efforts to conduct collective trade negotiations remain constrained. There are variations in resources and development strategies among member states, and difficulties in reaching compromises on strategic economic issues persist.

Strong Global Headwinds, Stubborn Imbalances, and Rising Competition

Anti-globalization sentiments have been rising in the United States and Europe, a backlash that has increased pressure in favor of the adoption of trade protectionist policies. Not so in Asia, where for the most part there are few signs of public resistance to globalization and many champions of free trade.[29] Prime Minister Narendra Modi has been an avowed proponent of free trade, drawing attention to its benefits. In his January 2017 speech to the Raisina Dialogue, Modi warned that “rising parochial and protectionist sentiments” are jeopardizing global economic gains.[30] Yet, the Modi government faces countervailing pressures at home where, despite a sharp focus on reviving manufacturing, it must contend with strong industry lobbying in favor of protectionist policies, and where not all the states fully support its pro-trade agenda. These domestic forces could constrain the Modi government’s ability to make the compromises necessary to move ahead on the India-G.C.C. economic and trade front.

Over the past decade, there has been phenomenal growth in bilateral trade between India and the G.C.C. countries. However, this trade has been heavily skewed in favor of energy, which is reflected in the trade deficit. Similarly, Gulf investment in India is primarily sourced from one G.C.C. country, with the U.A.E. accounting for over 80 percent.[31] From an Indian perspective, these imbalances are a cause of concern. However, it is not clear to what extent the implementation of an India-G.C.C. free trade agreement would help rectify such imbalances.

In the meantime, India is facing tough competition from China, Japan, and Korea — countries that are very strong in manufacturing — in accessing Gulf markets. China is the G.C.C.’s premier trading partner and the largest importer of petroleum products from the Gulf. The U.A.E. Cabinet recently took the bold decision to grant instant visas for Chinese visitors upon their arrival to the Emirates. Meanwhile, Saudi Arabia signed more than 11 agreements with China related to various investment fields.[32]

India has benefited handsomely from cheap crude oil over the past two years. Low prices halved the oil import bill, cooled inflation, and improved public finances.[33] But these conditions will not last forever. India’s ‘Link West’ (i.e., its relations with the Gulf Arab countries) are strongly forged and deeply anchored. And while there is ample scope and good reason for India to seek to strengthen them, making headway will likely continue to prove difficult — especially in these ‘unsettled times.’