Westward Bound: Building Stronger Indo-GCC Ties

As the Gulf Cooperation Council members seek to diversify their economic focus from just oil and gas to sectors like infrastructure, here’s what India can do to take advantage of that

TheGulf Cooperation Council (GCC) is increasingly growing into a major economic hub that has the potential to shape the global landscape concerning trade, investment, and overall economic development. The GCC member states are seeking to expand their footprint in the global supply chain by venturing beyond oil and gas reserves. They are repositioning themselves as important destinations for infrastructure, agriculture, financial services and private equity, among others.

According to the 2015World Bank (ease of) Doing Business Rankings, the UAE has been placed in the 22nd position. Saudi Arabia has been ranked 49th, Qatar 50th, Bahrain 53rd, while Oman is in the 66th and Kuwait in the 86th place.

Most of the GCC economies score high on the ease of dealing with construction permits, registering property and paying taxes. TheWorld Bank report also includes the UAE among the ‘Top 10 Improvers’ which have implemented about 40 regulatory reforms to facilitate the ease of doing business.

The UAE has reformed its credit facility system, property registration process and minority investor protection regime (through improved corporate governance rules and corporate governance standards).

Moreover, as per arecent report released by The Economist Intelligence Unit (“EIU report”), the GCC is emerging as an important business destination. It offers a rather heterogeneous investment climate, with the UAE and Qatar leading the outward-looking consortium of nations. Around 100 free zones have been established in the Middle East, with 40 such zones in the UAE itself.

The free zones, established to facilitate greater foreign investment, have adopted very investor-friendly approaches to give effect to the same. Qatar is also making several reformative amendments for creating a more conducive investment setting for foreign investors.

The report, further, notes that Saudi Arabia offers tremendous potential in terms of its sheer market size. With accelerating liberalization and favorable market dynamics, it will emerge as a very attractive investment destination in the Gulf region. Bahrain also offers an investor-friendly environment, especially concerning export-oriented industries.

While Oman’s current investment climate can be challenging for foreign investors owing to its local content policies, there are indications that the government will encourage foreign participation in its manufacturing and energy sectors.

The Middle Eastern countries are actively engaging with rapidly developing Asian economies such as India and China. In 2013, around 70 per cent of petroleum exports went to emerging Asian economies in comparison to less than 20 per cent of such exports flowing to Western Europe and North America.

In addition to this, the GCC economies are poised to become bigger economic centers of trade and investment. They are not only eyeing the Asian economies as energy importers but are also seeking to expand the bilateral relations to other avenues to achieve new economic milestones. Given this backdrop, it would be interesting to examine the substantial benefit that India can extract for a deeper economic partnership with the GCC.

Strengthening the Indo-GCC relationship

The GCC shares deep civilizational, economic and cultural linkages with India. The Gulf supplies around two-thirds of India’s energy requirements. It is home to about 6.5 million expatriates with the UAE alone housing over 2.5 million Indians.

A substantial portion of India’s foreign exchange receipts comprises remittances flowing from this region. In addition to oil and gas, the Gulf also offers a very lucrative market for Indian manufactured goods such as spices, food products, textiles, electrical goods and other information technology (IT) products. Opportunities for two-way trade in gold also exist.

The total bilateral trade between India and the GCC in the period 2013-2014 amounted to USD 150.3 billion, a manifold increase from the period 2004-2005 when the total trade amounted to just USD 16.9 billion. According to recentMinistry of Commerce data, the UAE is India’s third largest trading partner with total trade amounting to around 60 billion USD in the period 2013-2014. Saudi Arabia follows close as its fourth largest trading partner with a total trade volume of around 49 billion USD for the same period.

India and the GCC had signed aFramework Agreement on Economic Cooperation on 25th August 2004. The Framework Agreement underscores the importance of traditionally cordial relations that exist between India and the regional Union and seeks to enhance and stimulate economic cooperation between them on the basis of shared interests.

Only two rounds of talks have taken place so far as the GCC iscurrently reviewing its negotiations with all countries and economic groups. In this scenario, India should push for deeper bilateral ties with the Gulf countries so that it can derive maximum economic and strategic benefits that can ensue from such an economic cooperation.

‘Acting West’

The Government of India adopted the ‘Look West’ policy in 2005 under the leadership of Dr Manmohan Singh. In July 2005, Dr Singh had chaired a meeting of the Prime Minister’s Trade and Economic Relations Committee (TERC). He had emphasized that the Gulf region constitutes a part of India’s natural economic hinterland. Thus following the successful pursuit of the ‘Look East’ policy, Indiamust establish deeper economic ties with the Gulf region.

With Prime Minister Modi’s visit to the UAE and the recent issuance of theJoint Statement between the UAE and India, the ‘Look West’ policy has received a fresh stimulus. The Joint Statement strives to establish a comprehensive economic and strategic partnership. It aims to facilitate greater two-way trade and investment, strengthen defence relations, bolster cooperation in maritime and energy security, and promote deeper cooperation for peaceful coexistence, stability, and social and cultural harmony.

India should not only ‘Look West’ but also ‘Act West’ to solidify its relationship with the West Asian neighbours such as the GCC. The following sections shall illustrate how India can build stronger economic ties with the GCC countries.

Tapping into the GCC SWFs

The Joint Statement notes that through the establishment of the UAE-India Infrastructure Investment Fund, the UAE can support India’s plans for rapid expansion in its infrastructure sector. By encouraging inward foreign investment by Gulf-based infrastructure companies, state of the art infrastructure can be designed and developed in India. The attractive GCC sovereign wealth funds (SWFs) can also be tapped into for developing big power and infrastructure projects in India.

TheGCC is home to the highest concentration of global SWFs with over ten funds and close to US$1.7 trillion worth of assets under management. Historically, GCC SWFs have demonstrated a keen interest in infrastructure and real estate investments. Even though the GCC economies have been traditionally inclined towards engaging with the developed world, they are increasing their exposure to certain emerging markets. Financial crises associated with the Western world (Eurozone, for instance) is a prime motivator.

The Abu Dhabi Investment Authority (ADIA), through which the UAE controls the second largest SWF reserves in the world,has shown an interest in exploring major infrastructure projects in India. India is currently facing a massive infrastructure deficit, and it needs about1 trillion USD over the next five years (estimated for 2013-17) for closing this gap.

With Mr. Modi’s ambitious smart city plans, India will probably need more financing to bridge the deficit. India should utilize the GCC SWFs to accumulate greater investments for its infrastructure sector and, in turn, spur economic growth.

Utilising the GCC ‘Free Zones’

Free zones also offer great opportunities to India and even though the UAE trumps the other GCC economies in terms of the sheer number of free zones, countries such as Qatar and Bahrain are rapidly catching up.

India’s outward foreign direct investment (OFDI) for August 2015, stood at 2.19 billion USD, as perReserve Bank of India data. Investments comprised a mix of issuance in guarantees (1.83 billion USD), loans (177 million USD) and equity (184 million USD).

There has been an increase in comparison to August 2014 when the OFDI stood at 1.38 billion USD. FDI outflows in 2014 were mostly directed towardscountries providing higher tax benefits such as Netherlands, Singapore and Mauritius. The primary sectors which drew the maximum investments from India in 2014 included transportation, storage & communication services (around 28 per cent).

The GCC free zones offer aset of standard benefits such as 100 per cent foreign company ownership, 100 percent repatriation of capital, “one-stop shop” bureaucracy, and attractive tax exemptions, along with subsidized utilities for up to 50 years. Therefore, these free zones offer the perfect environment to the Indian companies for setting up shop in sectors such as transportation, technology, energy, IT, financial and other business services.

India should also seek to expand its presence in the global market through strategic investments in the GCC free zones. For instance, India should explore opportunities offered by the Kuwait Free Trade Zone (KFTZ). The Shuwaikh Port is the headquarters of the KFTZ and is owned by the Kuwait Ports Authority. This port is the main commercial port in the country and serves as India’s gateway to West Asia (particularly Iraq). Most of the GCC ports are ideally placed as trade platforms between Asia and the Far East on one hand and the West, Central Europe, and Africa on the other.

Therefore, these ports have the potential to transform themselves into important transport and logistics hubs. Some of the GCC ports arealready undergoing expansion to meet the increasing demand stemming from emerging markets such as India and China. India should actively engage with the GCC countries and encourage them to inject greater foreign investment in their port infrastructure. This will help build world class ports which are equipped to handle the rapidly growing trade volume.

Additionally, India should consider pursuing deeper economic and strategic engagement with the GCC to counter China’s growing economic influence in this region by focusing on certain strategic maritime centres such as the Shuwaikh port.

Encouraging GCC investments through ‘Make in India’

India has been substantially insulated from economic shocks which have affected other BRICS economies such as China, Brazil, Russia and South Africa. India is repositioning itself as a major manufacturing hub with the articulation of the ‘Make in India’ national programme. It should maximize the gains that can flow to it from this programme by creating an investor-friendly environment through effective reforms in its tax regime, land laws and bureaucracy procedures.

Moreover, with the shift in China’s focus from manufacturing and investment to consumption and services, India stands to derive strategic advantages concerning its manufacturing sector. The industrial push provided by Mr. Modi through the Make in India programme should be capitalized upon so that India emerges as the next important export destination for the GCC.

In conclusion, the Gulf countries and India share immense economic, social and cultural synergies. With growing energy needs, the Gulf region assumes the role of a vital interest zone for India. India is touted totake over China as the most populous nation by 2030, thereby creating the biggest potential consumer base for oil and gas, globally. Therefore, it is imperative for India to strengthen its ties with the GCC members for the purpose of energy security. It is also extremely crucial for India to give effect to the Indo-GCC FTA to fully realise the economic benefits that may result from such an economic partnership.

According to the EIU report, the threat of cheap GCC imports to local petrochemical industries has stalled FTA negotiations with China, India and MERCOSUR. India should push its GCC partners to sort out the outstanding issues which have stalled the FTA and seek its immediate conclusion.

Deeper economic cooperation with India, through investments in infrastructure and manufacturing, the GCC will aid in ushering in a new dawn of an economically powerful Asian leadership and support its own diversification agenda.