India - UAE Relations

2023 JUL 26

Mains   > International relations   >   India and Global Powers   >   India & West Asia

IN NEWS:

  • India and the United Arab Emirates recently signed pacts on the use of local currencies for cross-border transactions and the setting up of a campus of the prestigious Indian Institute of Technology in Abu Dhabi, as Prime Minister Narendra Modi visited the country and met the UAE’s ruler and President Sheikh Mohamed bin Zayed Al Nahyan.
  • This was Prime Minister Modi’s fifth visit to the UAE since he assumed office in 2014; he was the first Indian Prime Minister to visit the UAE in 34 years.

SIGNIFICANCE OF LOCAL CURRENCY SETTLEMENT SYSTEM:

  • RBI said that the MoU on establishing a framework for the use of local currencies for transactions between India and the UAE aims to put in place a Local Currency Settlement System to promote the use of INR (Indian rupee) and AED (UAE Dirham) bilaterally.
  • The creation of the LCSS would enable exporters and importers to invoice and pay in their respective domestic currencies, which in turn would enable the development of an INR-AED foreign exchange market, according to the RBI.
  • This arrangement would also promote investments and remittances between the two countries. 
  • The use of local currencies would optimise transaction costs and settlement time for transactions, including remittances from Indians residing in the UAE.
  • India is likely to use this mechanism to pay for crude oil as well as other imports from the UAE, which are currently made in US dollars.
  • India is the third largest oil importer in the world, and the UAE was its fourth-biggest supplier of crude in 2022.
  • The move to ink the pact with the UAE is part of a concerted policy effort by India to internationalise the rupee to bring down dollar demand as a means to insulate the domestic economy from global shocks.
  • Government officials had earlier indicated that, apart from Russia, countries in Africa, the Gulf region, Sri Lanka, and Bangladesh had also expressed interest in trading in rupee terms. 

WHY IS THE UAE IMPORTANT TO INDIA?

  • Remittances:
    • The country hosts at least 3.5 million Indians who work in diverse sectors of the economy of the Emirates and provides it with vital manpower support at all levels.
    • The remittances from the UAE in the first half of 2020 accounted for USD 21 billion.
  • Strategic considerations:
    • The UAE, due to its strategic location, has emerged as an important economic center in the world and is also a major re-export hub for India.
    • Further good relations with the UAE are imperative to counter China’s influence in the Middle-east region.
  • Security of the region:
    • The Middle-east region is still witnessing a lot of conflicts in Syria, Iraq etc.
    • Good relations with UAE are imperative to give India a core place in discussion surrounding the Middle-east region.
    • Further UAE can support India in strengthening the security of the Indian Ocean region especially along the western coast of Somalia that is prone to piracy.
    • India-UAE have been collaborating closely to counter terrorism as well.
  • Gateway to Africa:
    • Engagement with the UAE will pave the way for India to leverage UAE’s easy access to the African market and its various trade partners.
    • This can help India to become a part of the supply chain especially in handlooms, handicrafts, textiles and pharmaceuticals.
  • Entry into regional groupings:
    • UAE commands a significant respect in regional groupings like OIC (Organization of Islamic Cooperation) and GCC.
  • India’s Soft Power:
    • Good relations with UAE are a sine qua non for enhancing India’s Soft power in the Middle-east region.
    • A recent progression of it was witnessed in 2021 when both Abu Dhabi and Dubai celebrated Diwali.
  • Post-pandemic recovery:
    • It is understood that UAE as part of its post pandemic recovery plans is planning to revitalise its trade links with the region from the Mediterranean coast to Turkey on one hand and India and South Asia on the other.
  • Diversification plan of the Emirates:
    • In recent years, the UAE, through its ‘Vision 2021’, has sought to diversify its economy and reduce its dependency on oil.
    • This provides an opportunity for India to engage with it in new areas of renewable energy, start-ups, fintech, etc.

AREAS OF COOPERATION:

  • Economic:
    • Bilateral trade:
      • India-UAE trade rose to USD 85 billion in 2022, making the UAE India’s third-largest trading partner for 2022-23 and India’s second-largest export destination,oil being the main import from the Gulf country.
      • While India is the UAE’s second-largest trading partner and the largest in terms of exports.
      • In February 2022, India became the first country with which the UAE signed a Comprehensive Economic Partnership Agreement or CEPA.
      • India and the United Arab Emirates signed the Comprehensive Economic Partnership Agreement or CEPA.
        • It aims at increasing the non-oil trade between the two countries to $100 billion in five years from $45 billion 2021.
        • India expects CEPA to generate 10 lakh jobs across labour-intensive sectors such as textiles, gems & jewellery, leather, footwear, pharma, agriculture products, medical devices, sports goods and automobiles.
        • Bilateral trade has increased by approximately 15% since the entry into force of the CEPA on May 1, 2022.
    • Investment:
      • UAE’s FDI in India has increased over the past few years and currently stands at over 12 billion USD.
  • Energy Cooperation:
    • UAE has in the last four years emerged as the 3rd major exporter of Crude oil to India.
    • The UAE is the first international partner to invest by way of crude oil in India’s Strategic Petroleum Reserves Program.
    • The countries are also collaborating in the renewable energy sector as seen by mutual participation in the International Solar alliance.
  • Western QUAD:
    • India, Israel, the United Arab Emirates and the United States have decided to launch a new quadrilateral economic forum, informally named Western Quad/Middle East Quad.
    • It builds on ongoing cooperation between the U.S., Israel and the UAE after the Abraham Accords and India.
  • Bilateral Agreements:
    • India and the UAE have signed a number of Agreements and MoUs from time-to-time in different sectors providing an institutional framework for cooperation in those sectors.
  • Institutional Structure for Dialogue:
    • Annual Foreign Office Consultations are held at the Secretary level.
    • India-UAE Joint Commission Meeting (JCM) for Economic and Technical Cooperation deals with issues related to trade and commerce.
  • Pandemic Management:
    • Both sides had agreed on an Air Bubble Arrangement in 2020 during the pandemic which has enabled the movement of people between two countries despite the challenges posed by COVID-19.
    • The UAE was among the first countries to receive India’s indigenous Covaxin in February 2021.
  • Defence Cooperation:
    • With the signing of MoU on Defence Cooperation in 2003 and setting up of Joint Defence Cooperation Committee (JDCC) regular exchange of dialogue is taking place between the two countries.
    • With the UAE, India has In-UAE BILAT (bilateral naval exercise) as well Desert Eagle-II (bilateral air force exercise).
    • Navies of India and the United Arab Emirates have conducted bilateral exercise 'Zayed Talwar' off the coast of Abu Dhabi in August 2021, aimed at enhancing the maritime cooperation between two naval forces.
  • Indian Diaspora:
    • UAE hosts a large Indian community which numbers close to 3.5 million.
    • The nation has been a consistent provider of jobs to Indian people.
  • Sports:
    • The collaboration among the two countries in the domain of sports is also rising. This is testified by the occurrence of IPL 2020 and the last T20 world cup in UAE.

AREAS OF CONCERN:

  • Non-Tariff Barriers (NTBs) to trade:
    • Non-Tariff Measures (NTMs) have mostly been covered by Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT).
    • The UAE has 451 SPS notifications and  534 TBT notifications. The SPS notifications are mainly related to live poultry, meat, and processed food.
    • In addition, the TBT notifications are mainly related to fish, food additives, meat, rubber, electrical machinery, etc. These measures hamper India’s exports to UAE.
  • Arab- Iran Conflict:
    • The differences between Iran and the Arab world hinder India’s engagement in the Middle-east region.
    • Balancing the relationship sometimes results in reluctance of some strategic agreements.
  • Kafala System:
    • The inhuman conditions imposed by the Kafala system on immigrants sometimes create differences between the two countries.
  • Pandemic shock
    • Remittances from UAE marginally affected in 2020 when large number of Indian workers returned home because of pandemic related economic distress.
  • Religious polarization in India’s domestic politics:
    • Experts criticized that the recent comments on Prophet Muhammad reflect the religious polarization that exist in India’s domestic politics and such incidents may adversely impact the cordial relation with Gulf countries including UAE.

WAY FORWARD:

  • Establish more strategic dialogues: Both countries should establish more strategic dialogues between them like the 2+2 dialogue.
  • Reducing non-tariff barriers: India-UAE must try to bring more transparency and predictability in the use of NTBs so that their compliance becomes less cumbersome.
  • Focus on migrant population: India should actively engage with the UAE to reform the Kafala system. A reference of Qatar can be given who has promised to remove the inhuman conditions of the system.India must also make joint efforts with UAE to extend social security benefits to Indian migrant population.
  • Strengthen defence cooperation: Potential areas of bilateral cooperation in the defence field include Production and development of defence equipment, Joint exercises of armed forces, particularly naval exercises etc.

PRACTICE QUESTION:

Q. “The traditionally close and friendly India-UAE bilateral relationship has evolved into a significant partnership in the economic and commercial sphere”. Discuss.