India - UAE Relations The Beginning of a New Era?

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The real question in India-UAE relations is, however, how the recent changes in the diplomatic architecture between these two countries will manifest themselves in reality. Will the recently agreed comprehensive, strategic partnership lead to another quantum leap to achieve the aspired 60 percent trade increase by 2020? A closer look at both countries’ economic diplomacy might give us some clues for the answers.

Marhaba NaMo - this was the slogan on the banners displayed around the Dubai cricket stadium filled up with more than 50,000 Indian expatriates during Prime Minister Narendra Modi’s address on his state visit to the United Arab Emirates in August 2015. In an atmosphere of a ‘once in a lifetime event’, Modi was celebrated while speaking about India-UAE relations and socio-economic developments.

The 2.6 million strong Indian diaspora celebrated Modi like a pop-star after the announcement of some major initiatives including the setup of a fund for their welfare in the UAE. This February, Modi’s state visit was returned by Sheikh Mohammed bin Zayed Al Nahyan’s tour through India. Both events enjoyed greatest media attention in the UAE and have elevated the rhetoric about friendly relations to the level of a comprehensive, strategic partnership.

In Asia-Middle East relations, all evidence suggests that for countries of the Middle East and North Africa (MENA), Looking East is strategically as important as had historically been their orientation towards the West. According to recent economic figures, India’s presence in the Middle East will continue to grow during the upcoming decade. It remains to be seen, though, which role India decides to play in the region, and how it wants to strategically access the wider MENA market. One way of doing so is through a strengthening of its relation with the United Arab Emirates (UAE). The friendly relations between the two countries are based on a multi-dimensional engagement through stable political relations, economic activity and people-to-people exchange. The beauty of their relations is the synergy-effect that it promises for both sides. Through a strategic combination of forces, with India as the producer and the UAE as international distributor of India’s goods, both countries could join in an effect that would surpass their current individual impact on world affairs.

The real question in India-UAE relations is, however, how the recent changes in the diplomatic architecture between these two countries will manifest themselves in reality. Will the recently agreed comprehensive, strategic partnership lead to another quantum leap to achieve the aspired 60 percent trade increase by 2020? A closer look at both countries’ economic diplomacy might give us some clues for the answers.

The Roles of Abu Dhabi and Dubai in the UAE’s Foreign Policy

Two distinguishing features are fundamental to understanding the UAE’s foreign policy. First, it is an oil-rich country, Abu Dhabi being the indisputable political power centre and capital city. The Emirate disposes over 95 percent of the country’s oil reserves and is traditionally led by the Al Nahyan family of the House of Al-Falahi, which is a branch of the Bani Yas tribe. Since the foundation of the UAE in 1971, income generated through oil revenues has been generously distributed to forge a union with 6 adjacent Emirates of Dubai, Sharjah, Ras al-Khaimah, Fujeirah, Ajman and Um al-Quwain. Under the leadership of late Sheikh Zayed Al Nahyan, the founding father of the UAE, its foreign policy was shaped by local ambitions of a small state. In a globalising context, however, and particularly during the last 15 years, Abu Dhabi has concentrated on the exploration of models of good governance, diplomatic mediation and potential enlargement of its political economy.

Second, the UAE’s non-oil based economic development and business acumen is greatly shaped by the neighbouring Emirate of Dubai. Due to a lack of oil and gas resources, which covers only 6 percent of its annual budget for 2016, the Emirate of Dubai had to learn early on how to diversify its economy. Over the last 4 decades, Dubai has established itself as a trade hub counting mainly on the service, trade and logistics sector to generate income, thereby setting up a number of Government-Related Entities (GRE) such as Investment Corporation Dubai, Dubai World and Dubai Holding to drive the economy.

Moreover, Dubai strives to be the modern interpretation of a regional entrepôt with international outlook using the built-up capacities of Jebel Ali Port, two modern airports (Dubai International and Al Maktoum), and a cutting-edge infrastructure. Since 2006 and under the political leadership of Sheikh Mohammed bin Rashid Al Maktoum, Dubai has transformed itself from being a traditional trade hub (breaking up large shipments and re-exporting them into the world) to an operational knowledge hub attracting people, finance and international companies in the manner of a truly cosmopolitan and global city.

Diplomatic Ties - From Friendly Trade Relations to an Institutionalised, Strategic Partnership

What distinguish India-UAE relations is the shared values beyond the political and economic, namely an historic and cultural depth exemplified by both countries having been blessed with visionary leadership styles that has driven both towards positive change. Similar constitutional principles of justice, liberty and equality as well as peace, prosperity and stability have built a solid platform for their diplomatic partnership.

Sheikh Zayed, President of the UAE between 1971 and 2004, followed a foreign policy that particularly stressed good relations with its neighbours. India was no exemption and so modern-era diplomatic relations flourished since the establishment of the UAE embassy in New Delhi in 1972, followed one year later by the opening of the Emirati consulate in Mumbai, the Indian embassy in Abu Dhabi, and the consulate in Dubai. In 1975, relations gained a further boost through Sheikh Zayed’s visit to New Delhi and high level talks with the then Indian Prime Minister Indira Gandhi, followed by the then Indian President Fakhruddin Ali Ahmed exploring trade opportunities and mutual economic interest.

In hindsight, Sheikh Mohammed bin Zayed sees Indira Gandhi’s visit to the UAE in 1981 as a quantum leap in the course of their countries’ relations at a time when India was under pressure from the Arab world after having opened an Israeli consulate in Bombay. She was nervous about being diplomatically isolated by Saudi Arabia and other Gulf countries, which would have exposed the large Indian Gulf diaspora. At stake was also a large flow of remittances, at the time like manna from heaven to the challenged Indian economy. That these fears did not materialise was not least due to the support of Sheikh Zayed and the strong signals of his repeated state visits to India in 1983 and 1992.

Evolutions in Economic Diplomacy

April 1992 marked a new stage in the Indian-UAE diplomatic partnership. A Double Taxation Avoidance Agreement (DTAA) was a first step towards the standardisation of vital bilateral regulations. In the coming decade, further standardisation efforts led to the Institutionalisation of relations in form of the 2004 framework agreement on economic cooperation between India and the Gulf Co-operation Council (GCC). The agreement aimed at the creation of a free trade zone, which clearly acknowledged the growing importance of economic and commercial relations between India and all the GCC countries.

Against this backdrop, Sheikh Mohammed bin Rashid al Maktoum, Vice-President of the UAE and Ruler of Dubai, visited India in 2007. Accompanied by a high-rank trade delegation, at that time the UAE had already become India’s primary trade partner in the Middle East and North Africa (MENA) region. Sheikh Mohammed’s lobbying for Dubai’s liberal trade environment and investment exchange, particularly at the private sector level, led to a number of real estate projects and joint ventures. For example, the Dubai-based real estate company Nakheel started working together with the Indian Dubai LF Group. Another contract signed between India and DP World enabled the latter to operate 6 ports in eastern and western India. These steps reflected a global trend in economic and trade diplomacy away from bilateral export promotion towards cluster-building through public-private mixed investment projects. In particular, the 2007 state visit meant a first step towards a strategic economic and investment partnership for UAE-India relations.

A more comprehensive, strategic partnership was envisaged at the 2010 state visit of the then Indian President Pratibha Patil during which the progress and future bilateral relations were discussed, leading to the institutionalisation of economic relations with Sheikh Mohammed Al Maktoum. These talks also led to the establishment of a widely celebrated UAE-India Joint Task Force on Investments in 2012, which held its first meeting in February 2013 and embodied the new strategic dimension of India-UAE trade diplomacy.

The task force stood, among others, for the promise of more investment opportunities in the near future. And indeed, in 2013, the value of bilateral trade reached a preliminary all time high of $75 bn. However, this initial economic success would not last as political realities caught up with India-UAE relations - the free trade zone idea struggled with a lack of homogeneity of the GCC market, while India fought with bureaucratic hurdles, outdated laws and underinvestment in infrastructure. As a result, bilateral trade decreased by about 20 percent in the following year. The reason most often given for this bump is the imposition of a 10 percent duty on imports of gold, one of the major trade commodities from Dubai to Mumbai.

The Synergy Effect of a Comprehensive Strategic Partnership

To date, the UAE is the 10th largest foreign investor in India, and the largest Arab investor country in India, responsible for more than 80 percent of Arab investment. Its total investments amount to $8 bn of which $3.13 bn are in the form of Foreign Direct Investment (FDI) and $4.87 bn in so-called portfolio investments, which focus on gain participation only. Overall, the UAE’s investments are divided among five sectors - construction (16%), energy (14%), metallurgy (10%), services (10%), computer software and hardware (5%).

In a comprehensive and strategic partnership, India and the UAE can create a synergy effect for their respective roles in the global economy. India is in great shape with the world’s fastest economic growth rate of 7.6 percent in 2015-16, the strongest growth it has experienced since 2010. Interestingly for UAE-India relations, particularly the manufacturing sector (9.5%) was a strong driver of growth, while India’s mining and quarrying, electricity and power supply sector are decelerating. The UAE can be a useful partner for both, supporting the international distribution of Indian goods and providing access to additional energy resources. Abu Dhabi’s capacity to function as an energy supplier can help with India’s growing energy demand. Energy cooperation could take the shape of Indian companies buying onshore petro concessions of Abu Dhabi Company for Onshore Oil Operations (ADCO). Concessions would last for 40 years giving access to a total of 15 onshore oil-fields, which make up over 50 percent of Emirate’s oil production.

Dubai’s role, however, would be that of an entrepôt and logistics centre helping India to reach markets within the MENA region. This is already working well as reflected in India being the UAE’s largest trading partner, thanks to an attractive free zones concept. For example, Jebel Ali Free Zone Authority (Jafza), Dubai’s flagship free zone entity, has attracted more than 800 top Indian multinationals so far. Another key role in strengthening trade relations between India and the UAE is the Dubai Airport Free Zone Authority (Dafza). In 2015, the number of Indian companies operating from Dafza increased by 23 percent, giving Indian investors the top spot accounting for 38 percent of total Asia-Pacific investments. These investments focus on electronics and communication sector, computer, Internet and IT solutions as well as jewellery, watches and precious stones. Some of the leading Indian companies at Dafza are Tata Group, Kalyan Jewellers, and Wipro. Both free zones, Jafza and Dafza, contribute largely to the total of $55 bn that the 50,000 registered Indian companies invested in the UAE in 2015.

Strategic, Comprehensive Investments & Opportunities in Logistics, Finance and Telecommunication

Current trade relations between India and the UAE reflect a general trend in economic diplomacy - getting away from traditional bilateral trade cooperation, involving both sides in cooperative investments in a number of strategically important sectors. The comprehensive strategic partnership between India and the UAE includes cooperation in a number of fields with shared strategic priority such as security (counter-terrorism), defence collaboration (joint naval exercises), and research and development, particularly in the field of sustainable energy and space science.

Areas with major chances of economic growth exist in the field of logistics, finance and telecommunication. As of the beginning of 2016, there are 35 Emirati investment firms operating in India. The three most commonly known ones are Emaar Properties, Abu Dhabi National Energy Company (Taqa) and DP World. The latter is a global marine terminal operator, which owns 6 key container terminals in India and is currently developing the International Container Trans-shipment Terminal (ICTT) in Kerala. It recently opened a new wharf at the Nhava Sheva Gateway Terminal at Mumbai’s Jawaharlal Nehru Port, and announced that its investments in India topped $1 bn.

In the finance sector, Emirati government-related entities such as the Abu Dhabi Global Market (ADGM) hope to become a gateway for Indian financial institutions assessing the Gulf region. Given that Islam is the second-largest religion with about 180 million adherents, India is an interesting market for the UAE’s growing influence in Islamic finance and Sharia-compliant ‘Sukuk’ investments. Additionally, during Sheikh Mohammed bin Zayed’s recent state visit, the Dubai Economic Council signed an agreement with India’s Import and Export Bank to encourage investments, support the funding of projects and prepare market studies.

These studies are particularly directed towards another sector of common strategic interest - India’s telecommunication and technology sector. It is currently considered its most extensive growth sector in the various fields in which smartphones can be used for commercial, economic and service transactions. A great opportunity for Indian and Emirati businesses alike is the presence of a joint investment fund worth $2 bn that has been set up to spur ideas for the ‘smart-city-sector’ on both sides of the Indian Ocean.

There is no doubt that the recently agreed comprehensive, strategic partnership has the potential to lead India-UAE relations into a new era. The market conditions are favourable - the UAE is the Arab powerhouse in India, which is expected to be the world’s fastest growing economy in 2016. The synergy effect is mutually attractive and can build upon a sturdy base of clustered investments, public-private partnerships and an advanced institutionalisation of economic diplomacy between India and the UAE. Decisive for the mutual success will be whether the momentum created by the recent state visits can be sustained turning the comprehensive, strategic partnership into practical programmes and projects.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.