India-UAE FTA: Catapulting India’s Export Ambitions

‘Maintaining confidence in international trade will be critical to the broader economic recovery in the post-Covid world.’ – Liz Truss, Secretary of State for Foreign, Commonwealth and Development Affairs of the United Kingdom

In February of this year, India and UAE signed a Free Trade Agreement (FTA), which was aimed at reducing tariffs for 80 pc of goods and give zero duty access to 90 pc of India’s exports to the UAE. The broader goal of this agreement was to boost annual India-UAE bilateral trade to $100 billion within five years, as against $60 billion currently.

Within just 88 days of negotiations, a Comprehensive Economic Partnership Agreement (CEPA) was signed by Commerce and Industry Minister Piyush Goyal and the UAE’s Minister of Economy. “This comprehensive economic partnership agreement covers a wide array of gains for both economies, provides opportunities for business in both economies“, said Goyal, after signing this agreement.

The backdrop:

India has been talking to several bilateral and regional partners over last couple of years with a goal to boost export-oriented domestic manufacturing. This comes along side New Delhi setting for itself an ambitious export shipment target of $450 – 500 billion by FY’23, as against $291 billion in FY’21. Early signs seemed positive on this front. For April – September 2021, Indian exports had touched $197.89 billion, up 57 per cent YoY for same period.

However, when it comes to international trade, India has historically been cautious and slow. Cases in point are the Regional Comprehensive Economic Partnership (RCEP) and negotiations with EU. After six years of negotiations with RCEP from 2013, India pulled out in late 2019.

With EU, talks had first started in 2007 and the negotiations have hit multiple walls. The last major FTA India had signed was the India-Japan CEPA in August 2011. It was thereby commendable when in just 88 days, India concluded this full-fledged CEPA with UAE.

The significance:

India and the UAE (and by extension the GCC region) are in a way natural trading partners, given the complementarities that they share. There is a common value chain that exists among product lines India and UAE trade. This is evident from the figure as below.

India’s top 10 exports to UAE by value (USD Million)

Precious metals, mineral fuels, ships, iron and steel, nuclear appliances are all sectors where the countries share a complementarity in value chain. This is where the FTA will leverage the maximum bilateral gains for both the countries.

The tariff reductions from the CEPA will help address the inverted duty structures and instability caused by domestic tariff changes. According to the International Trade Centre’s Export Potential Map, India has an untapped potential for goods trade with UAE of about $10.1 billion, and CEPA is going to provide a fillip to that cause.

The latest rivalries with China and the growing concerns of over-reliance on Chinese supply chains has also led India to look for new partners in the West, and the India – UAE FTA will be a right step in that direction.

India is the UAE’s second largest trade partner, accounting for 9 per cent of UAE’s total foreign trade and 13 per cent of non-oil exports. The UAE is India’s third largest bilateral trade partner. The UAE is also India’s eighth biggest foreign investor, with a cumulative FDI worth nearly $11 billion.

Taking it off from this strong relationship that both countries share with each other, the India – UAE CEPA will address the following:

- UAE is set to eliminate duties on 80 per cent of its tariff lines which account for 90 per cent of India’s exports to UAE by value. Annual exports from India to UAE worth about $26 billion that attract a 5 per cent import duty currently are expected to benefit.

- The above is very much relevant for products in highly competitive sectors such as textiles and garments where import tariffs have imposed stiff competition to India. An example being current Indian textile and leather exports, where UAE imposes a 5 per cent duty, compared to 0 per cent from Vietnam and Bangladesh.

- The zero duty access for Indian products will expand over 5–10 years to about 99 per cent of India’s exports by value. These include electronic goods, chemicals and petrochemicals, cement, ceramics, and machinery.

- Key domestic sectors that are expected to benefit would be gems and jewellery, textiles, leather, footwear, sports goods, engineering goods, pharmaceuticals, automobiles. An additional 10 lakh jobs is expected to be created out of this in India.

- India has agreed on concessional import duties on gold imports up to 200 tonnes per year, and UAE has eliminated tariffs on jewellery. This is one example of complementarity that India and UAE product lines enjoy.

- ‘Sensitive list’ of products: India has kept 1,157 sensitive products out of the ambit of duty-free entry into India. These include all dairy items, most automobiles and components, fruit, cereals, sugar and food preparations, tobacco products, dyes and pigments, natural rubber, tyres, TVs, toys, etc.

In particular, manufacturing sectors wherein government has rolled out Production-linked incentive (PLI) schemes are put on negative list in the trade pact.

- Automatic registration and marketing authorisation of Indian generic medicines in 90 days: UAE has agreed to facilitate market access and regulatory approval within 90 days for Indian pharmaceutical products and medical products that have been approved in developed jurisdictions like US, UK, EU, Canada, Australia.

-Liberalised visa regime for Indians: UAE has agreed to a three-year visa for intra-corporate transferees and a 90-day visa for business visitors and contractual service suppliers from India.

- Strict rules of origin: The India-UAE CEPA has strict rules of origin in the pact to prevent products manufactured in a third country to take advantage of the CEPA route via UAE. The rules mandate 40 per cent value addition or substantial processing of up to 40 per cent in the exporting country to qualify for lower tariffs.

Aluminium and auto components would need value addition of 45 per cent to qualify for this. In case there are significant surges in imports observed for any specific product, the agreement has safeguards against that too.

- Digital trade chapter: This is the first time that in any FTA, India included a chapter on digital trade. While this part of the deal is applicable on a “best endeavours basis” (not subject to dispute settlement mechanism), it covers areas like paperless trading, consumer protection, unsolicited commercial electronic messages, personal data protection, etc.

The CEPA will prove to be a landmark trade deal for India, given it will open up the vast Emirati market for manufacturers. The UAE offers investors more than 40 multidisciplinary free zones, in which foreign investors can have full ownership of companies and enjoy 100 per cent repatriation of capital and profits, 100 per cent exemption from corporate and income taxes, and full exemption from customs duty.

Indian apparel exports will get a push, and so will Indian jewellery sector. UAE has also agreed to be home for the first ever IIT outside of India.

The deal also opens up a market to the other GCC countries, and talks are on in that regard. India may soon consider a Preferential Trade Agreement (PTA) with Oman. GCC has a combined nominal GDP of $1.6 trillion, and what better way to tap this gem of a market than this! Access to UAE will also give certain exporters access to the EU market and Africa.

“The UAE welcomes a wider India-GCC trade deal. Our CEPA with India does not preclude a region-wide deal and, indeed, there is a specific article in the agreement that leaves this possibility open”, said Thani bin Ahmed Al Zeyoudi, UAE Minister of State for Foreign Trade.

Indeed, with exports being a focal point of attention for the present day central government, the India-UAE CEPA may just be that elixir that India needed to catapult itself to a 1 trillion dollar each of merchandise and service export behemoth by 2030.

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