Bahrain: A GCC Hub for India Trade

Special Report

The resilience of Bahrain's role as an emerging financial hub can be substantiated from Dubai's doom and gloom cycle in the aftermath of the 2009 financial crisis

Bahrain was a critical node connecting two trading civilisations of Mesopotamia and Indus Valley in the pre-history era. In the 19th century, it emerged as a cosmopolitan hub hosting several trading diaspora from the Arabian Peninsula, Europe, Persia and India among others.

Bahrain could not have transcended from a primitive economy solely dependent on pearling and fishing to today's vibrant modern economy, thanks to its strategic position on the transnational trading network and early oil-led industrialisation. Maritime Asia complemented Bahrain’s emergence as a critical node in the changing economic geography of the present century via, for instance, the reorientation of the Byzantine trading interconnections along the Silk Route that for centuries defined mutually reinforcing economic and commercial exchanges among early globalisers in the Middle East, maritime Asia, and the industrialised West.

Within a span of less than five decades, Bahrain evolved as an 'archipelago of opportunity' with booming economic sectors such as real estate and construction, tourism and hospitality, mass communications, shipping and logistics, and retail and finance. Bahrain’s development evolution epitomises the success of an innovative state-led capitalist growth model that also characterises subsequent development of growth spots such as Dubai. Bahrain’s growth is a remarkable case study of economic diversification away from resource dependence. Realising that oil revenues would significantly decline and could not provide a solid base for economic growth, Bahrain’s rulers strategically shifted to foreign trade as the main source of income. Bahrain leveraged its historical legacy of being an open trading economy and developed adequate infrastructure for facilitating trade, such as sea and air ports, which further stimulated the growth of industries such as tourism and the financial sector.

The resilience of Bahrain’s role as an emerging financial hub can be substantiated from Dubai's doom and gloom cycle in the aftermath of the 2009 financial crisis. While investors and traders were scuttling for Dubai exit plans, Bahrain continued to be an attractive destination. Nevertheless, the onset of Arab Spring and a subsequent spate of civil unrest in Bahrain created a sense of transitory instability and subdued economic confidence. Barring political concerns, the long-term attractiveness of Bahrain as a trading hub continues to be positive.

One of the most important strands of Bahrain's legacy as a trading hub is its commercial relations with India. Bahrain’s historic relations with India not only propelled increasing economic interdependencies, but also created numerous opportunities elsewhere in the economic hinterland spanning from the Mediterranean to Africa. Before Bahrain’s emergence as a trading hub, India was the leading destination and source for Bahrain’s exports and imports. The Indian rupee was largely circulated as a legal tender in the Gulf region, including Bahrain. Commercial exchanges between the two countries included dates, pearls, textiles, and numerous other goods and services. This period also witnessed manpower exchanges through the settlement of wealthy Indian merchants in Bahrain and throughout the Arabian Peninsula. Indian merchants by virtue of their skill and expertise not only revolutionised the commercial landscape, but also expanded their business activities beyond the Gulf into Africa and other regions from their bases in Bahrain.

In the post-liberalisation era that witnessed spectacular growth of Indian economy moving away from agriculture to services, India’s relations with Bahrain grew both in scope and depth. Indo-Bahrain bilateral trade currently (2013-2014) stood at a whopping $1.2 billion; a spectacular jump from merely $220 million in 1999-2000. This golden decade of trade has also witnessed intense economic relations between the two countries and its spill over into other political and strategic dimensions.

Indo-Bahrain relation is currently poised at a critical juncture that has several mutual synergies and complementarities. Bahrain is one of the most open economies and is located at the entry gate of a huge wealthy consumer market consisting of Northern Gulf (Saudi Arabia, Qatar, Kuwait, and Iran) and other emerging economies of the Middle East and

North Africa. Its well-established trade logistics provide the necessary infrastructure for companies and countries to start business and expand into neighbouring markets.

One of the most diversified economies in the GCC region, manufacturing sector contributes nearly 15 percent of Bahrain's GDP, spearheaded by first-moving entities such as Aluminium Bahrain (Alba) - the world’s biggest aluminium smelter – among others. Bahrain’s strategic focus on attracting investment in manufacturing as per Bahrain Vision 2030 will offer outstanding opportunities for Indian companies and investors. Other enablers that attract foreign investment and facilitate seamless trade movement are regional manufacturing and logistics hub, multi-special investment zones such as Bahrain International Investment Park (BIIP), Bahrain Investment Wharf and Bahrain Logistics Zone, strategically located in the vicinity of the new Khalifah bin Salman Port at Hidd.

There are several formidable market entry factors that substantiate Bahrain’s potential as a GCC trading hub for India. For example: strategic location; world class infrastructure; low cost operations compared to Dubai; more than 65 bilateral trade agreements (important among them is US-Bahrain FTA that allows duty free access to US market for company products with only 35 percent value added manufacturing in Bahrain) among others.

Indian companies at the moment are using Dubai as a hub to serve regional markets such as Saudi Arabia, Kuwait, Qatar, Iran and rest of the Middle East and Africa. The primary reason is the underdeveloped trade logistics of these destination markets; for example, goods in transit from UAE take longer time to reach Saudi market due to longer procedures at the border customs and inadequate infrastructure at Saudi sea ports. These bottlenecks increase trade costs for exporters that could be avoided from hubs such as Bahrain due to in place infrastructure and less lead time.

Given Bahrain’s current strategy of economic development pioneered by the Economic Development Board in terms of putting in place physical infrastructure conducive for seamless movement of cross border trade; Bahrain’s role as a regional trading hub is re-emerging. This is the right opportunity for Indian traders to be a part of an emerging ‘critical mass of trade’ that goes beyond the small wealthy consumer base of northern Gulf to the aspiring millions of virgin Africa. Moreover, Indian business community’s age-old legacy with Bahrain and its fledgling entrepreneurial business community will provide the much needed soft infrastructure for mutual growth and benefit.

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Dr Samir Pradhan is an economics specialist based in the UAE.

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