February 3, 2017

UAE-India Diplomatic and Economic Ties Strengthen

Indian Prime Minister Narendra Modi, left, gestures as he receives Abu Dhabi's crown prince, Sheikh Mohammed bin Zayed al-Nahyan at the airport in New Delhi, India, Jan. 24. (AP Photo/Manish Swarup)

While the United Arab Emirates and India have maintained a relatively healthy bilateral relationship, cooperation has recently appeared to be growing. A climate of fiscal austerity prompted by low oil prices has driven the Gulf Arab states to build and strengthen global partnerships. This comradery was highlighted in late January when India welcomed a high-profile delegation led by Sheikh Mohammed bin Zayed al-Nahyan, crown prince of Abu Dhabi, and including the ministers of economy, foreign affairs, and defense, to name a few. During the visit, India and the UAE signed 14 Memorandums of Understanding, and the crown prince was the chief guest at India’s 68th Republic Day celebrations. With consistently high trade volumes between India and the Gulf region, and Indians constituting the largest expatriate population in all the GCC states, there is an escalation in diplomatic and economic ties.

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With oil and gas products making up a large portion of goods traded between India and the UAE, trade volume has declined in recent years due to falling global demand. Carbon products are India’s biggest import from the UAE, and comprise about 14 percent of all Indian exports to the emirates. Refined petroleum is also India’s biggest export, making low oil prices a shared concern for the two countries. A collaborative effort toward energy security appeared to be high on the agenda of the recent diplomatic visit. Of the 14 MoUs signed, two featured energy industry cooperation, one of which was an agreement between Indian Strategic Petroleum Reserves Limited and Abu Dhabi National Oil Company to store oil reserves in India’s storage facility in Mangalore. Not only does this provide ADNOC with a strategically-placed oil reserve without having to invest in infrastructure, but also gives India access to 6 million barrels of crude oil in the event of an energy emergency.

In the buildup to the visit, expectations were high for the creation of the $75 billion UAE-India Infrastructure Investment Fund, which was introduced in 2015. The fund, however, was not part of the talks during the diplomatic visit according to Ahmed Al Banna, UAE ambassador to India, who stated that proper governance structures were yet to be put into place by the Indian government. This cautious demeanor is to be expected, with the recent structural reforms and policy changes taking place in India, demonetization is one of the recent major ones. India’s highly competitive markets, coupled with its unclear and evolving regulatory environment, have also been a barrier to Emirati companies in the past, with Etisalat, a telecom provider, forced to withdraw its operations from the country in 2012. The delay of the Infrastructure Investment Fund, however, does not necessarily forecast a breakdown in investment relationships. The UAE is a major investor in India with around $8 billion invested in a variety of industries by state-related entities like the Emaar Group, TAQA, and Nakheel. Similarly, India is the third largest investor in the UAE, with Indian private investors participating in infrastructure development and construction industries, expatriate-run small and medium-size enterprises, and private investments in real estate.

Although investment and trade ties attracted the most attention, national security was heavily featured in the MoUs signed, and has been a pressing matter in the last couple of years. The heads of the two states signed an Agreement on a Comprehensive Strategic Partnership, the framework for which had been laid out in joint statements issued in August 2015 and September 2016. Taking a stance against terrorism and radicalization, as well as coordinating on defense and military agendas, is a focus of the statements. MoUs were also signed between the Ministries of Defense, National Security Councils, and the federal governments on issues pertaining to cyber security and technology, armaments, defense industries, and maritime trade ties. Although trade and investment between the two countries has traditionally comprised of real estate, consumables, and hydrocarbon and agricultural resources, these recent developments suggest an increase in defense and cyber technological collaboration.

The strengthening of diplomatic relations, and signing of agreements, is significant at a time when expatriates in the GCC states are starting to feel the effects of austerity measures. GCC remittances to India fell by 2.2 percent to $35.9 billion in 2015. While this might be a marginal change, prolonged low oil prices, and implementation of further fiscal reforms, such as remittance taxation, could result in a further drop. In addition to this, national development plans for some GCC states, particularly Saudi Vision 2030 and Kuwaiti Vision 2035, aim at reducing the number of expatriates in the coming years. Expatriates in the UAE have also started to see their utility bills increase with the introduction of a municipality tax and higher tariffs. Trade between India and the GCC states as a whole has also suffered, declining by 18.7 percent in 2016. Reforms such as Saudi Arabia raising customs duties for 193 products, including food and beverages, chemicals, and consumer products, could exacerbate this problem. As cereals, organic chemicals, and clothing and apparel are the top imports from India, the increased customs duties are going to have an adverse effect on trade relations between India and Saudi Arabia.

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Given the extent of the integration of Indian businesses and expatriates in the UAE’s economy, resource interdependence, and physical proximity, this recent commitment to stronger bilateral ties is a strategic move in the right direction for both countries. With the added importance of significant security issues on the agenda, monitoring the direction of these talks could provide a glimpse into the future of their bilateral relations.

Naidhruv Singh is a research assistant at the Arab Gulf States Institute in Washington.