UAE trade pact is spearheading regional interest in India, writes Vandana Chatlani
February 2023 was the first anniversary of the signing of the Comprehensive Economic Partnership Agreement (CEPA) between India and the United Arab Emirates (UAE). The pact is the first bilateral trade agreement signed by the UAE, and India’s first bilateral trade agreement in the Middle East and North Africa region. Through the accord, both India and the UAE have ambitions to boost trade from USD60 billion to USD100 billion over the next five years.
In a tweet in February, Thani Al Zeyoudi, the UAE’s minister of state for foreign trade, said non-oil trade between India and the UAE had increased by 10% to almost USD50 billion since the CEPA came into force. The statistics signalled “a powerful economic alliance that promises to help unlock the Asian future and shape the trade routes of tomorrow”, wrote Al Zeyoudi. “The economic centre of gravity is shifting south and east – and #IndiaUAECEPA puts us both right at its centre.”
If multilateral trade expansion into the Middle east is India’s goal, the CEPA is the sharp edge of developments. Mitul Kaushal, an economist and member of the international trade and customs team at Economic Laws Practice in New Delhi, predicts that Gulf Co-operation Council (GCC) economies will also soon witness an upswing in investment from India following announced plans to resume talks on a free trade agreement.
The fact that this is being discussed once again is encouraging, says Kaushal. “Moreover, the India-UAE CEPA contains an explicit provision under article 18.3 that allows a customs territory (such as the GCC) or a group of countries to accede to the agreement, implying that the Indian government plans to foster investment and trade with the other GCC economies as well.”
The majority of the CEPA’s benefits relate to the reduction and/or removal of tariffs. The UAE has agreed to eliminate duties on over 97% of its products, which accounts for 99% of Indian exports to the UAE in value terms, while India has pledged tariff eliminations on more than 80% of the goods that the UAE exports to India.
For India, these exports include jewellery, textiles, leather, footwear, furniture, sports goods, plastics, agricultural and wood products, engineering products, pharmaceuticals, medical devices and automobiles.
“The UAE is India’s third-biggest trading partner, while India is the Emirates’ second-largest trading partner,” says Jshree Gupta, the founding member and managing director of The In-House Company, or THINC, a Dubai-based legal consultancy and business advisory firm. “As Mohammad Ali Rashid Lootah, president and CEO of the Dubai Chambers, said during his keynote address at the India-UAE Partnership Summit, the number of new Indian companies that joined the Dubai Chamber of Commerce in 2022 exceeded 11,000, bringing the total number of Indian companies registered with the Chamber to more than 83,000.”
Aarti Thadani, a senior litigation and disputes lawyer at Norton Rose Fulbright in Dubai, has seen both Indian businesses, including large multinational conglomerates, and UAE-based firms expand their operations.
“Businesses looking at each territory are strategic with a view to long-term enhanced ties and operations,” she says. “The ties between India and the UAE – which were always historically strong – have strengthened over the past year, following the introduction of the CEPA. The opening up of both markets has also prompted some movement of wealth between the two countries, driving family offices to consider establishing a presence in both jurisdictions.”
Thadani says energy, financial services, education, healthcare and food security are sectors that have received a specific boost from the CEPA.
Looking beyond the industries above, as well as traditional sectors such as oil and gas, Gaurav Jain, a senior associate at Eversheds Sutherland in Dubai, says he has spotted “a lot of Indian investments, both private and public, in real estate, jewellery, retail and startups in the UAE”. He notes, however, that it will take at least three to five years to see the full impact of the CEPA.
Outbound investment from the UAE to India has also been promising. Suhail Nathani, the managing partner of Economic Laws Practice in Mumbai, points to a recent investment mobilisation summit in Uttar Pradesh that saw UAE companies make commitments of more than AED8.2 billion (INR179 billion) in the state.
“By way of example, three UAE companies – Lulu Group, Sharaf Group and Hindustan Ports – have committed to invest INR45 billion, INR13 billion and INR2.1 billion in retail, hotels and logistics parks in [Uttar Pradesh], respectively,” says Nathani. “Similarly, Astha Green Energy Ventures and Shree Siddharth Infratech & Services will invest INR44.8 billion and INR80 billion in renewable energy, respectively.”
In a bid to cement ties further, the UAE chapter of the UAE-India Business Council was launched on the first anniversary of the CEPA by both governments to pinpoint strategic projects in which both countries could participate. This includes infrastructure projects in India, and manufacturing and technology collaborations.
Indian investors have long enjoyed a close relationship with partners in the UAE because of business ties, geographical proximity and cultural familiarity. The CEPA, along with legal changes enacted shortly before it, has helped bring the two nations closer.
“Historically the 51% ownership rule had been a stumbling block for foreign investors investing in businesses onshore in the UAE,” says Clint Dempsey, a Dubai-based partner and head of the Eversheds Sutherland banking and finance team in the Middle East. “The UAE Federal Decree No. 26 of 2020 has eased investment rules for foreign companies in the UAE by allowing 100% onshore ownership in various sectors. The law is a recent development and we expect to see its benefits in the next two to five years.”
In addition to easing investment regulations, the CEPA also includes detailed provisions to expedite dispute resolution through mutually agreed settlements, mediation and the setup of a panel among other mechanisms.
Dempsey has observed an improvement in disputes separate from the CEPA, noting that a considerable number of UAE judgments are being enforced in India through mutual recognition of judgments, which was a major challenge prior to 2020. “It will be interesting to see how disputes are resolved under CEPA’s new guidelines,” says Dempsey. “Effective and efficient resolution could further improve investor confidence.”
Sectors of interest
The CEPA’s stringent value addition criteria will likely determine the direction of some investment flows.
“Speaking from the perspective of the CEPA, any concession related to a trade in goods is linked to the goods satisfying stringent rules of origin and value addition criteria,” says Anjali Hirawat, a partner at Lakshmikumaran & Sridharan in Mumbai.
The CEPA mandates that certain products exported must fulfil the value addition criteria – meaning that for a product to be classified as an export from India or the UAE, at least 40% of new value will have to be added to it in the country of origin. And for a product to originate from India or the UAE, it must be wholly obtained and/or produced in those countries, or have undergone sufficient working or production according to product-specific rules.
“On most products, the CEPA requires that the value addition be no less than 40% and on others, such as agricultural products, the requirement is that of ‘wholly obtained’ or ‘partly produced’,” explains Ameeta Verma Duggal, a founder partner at DGS Associates in New Delhi. “With such restrictions on origin, it is expected that the two countries will increase their investments in value-added sectors like electronics, automotive, machinery, gems and jewellery, and so on.”
Many Indian companies have already set up manufacturing units either as joint ventures or in special economic zones for cement, building materials, textiles, engineering products, consumer electronics and more, says Duggal. “Investments are also being made in tourism, hospitality, catering, health, retail and education sectors, which are now covered under CEPA.”
Through its “Make in India, Make for World” campaign, India continues to encourage and welcome investment in almost all sectors. “At least for the UAE, and the Middle East largely, we do not envisage any imminent legal and regulatory hurdles,” says Duggal.
Of course, origin rules are equally important for UAE investors keen to explore the Indian market.
“As far as India is concerned, compliance with CAROTAR [Customs Administration of Rules of Origin under Trade Agreements Rules] is often seen as a regulatory hurdle,” says Hirawat. “Non-tariff barriers are also something to be kept in mind.”
Other rules regarding investments in India relate to “commercial agents, shareholdings and entities which mandate the presence of local directors and compliances that are unfamiliar to investors”, says Nathani. “This can put a dampener on investments.”
Hirawat acknowledges the special attention paid to particular industries and micro, small and medium enterprises. “As a new-age agreement, CEPA also focuses on trade in services in various sectors,” says Hirawat. “Interestingly, government procurement and digital trade are also key focus areas in CEPA. The agreement also provides increased market access to Indian pharmaceutical products in the form of speedy automatic registration and market authorisation.”
Although the volume of trade and investments across these diverse sectors is expected to build up over time, mounting interest and action in areas such as fintech, telecommunications and automotive is visible.
“Both the UAE and India are at the forefront of technological innovation,” says Shabnam Karim, a disputes partner at Norton Rose Fulbright in Dubai. “The UAE recently launched the world’s first independent regulator for virtual assets [the Virtual Assets Regulatory Authority], and the DIFC [Dubai International Financial Centre] hosts an array for fintech businesses as part of its fintech hub,” says Karim. “The technological focus of both countries has given Indian tech-focused businesses the opportunities to set up operations in the UAE, particularly businesses that are app-based and consumer-focused.”
Indian fintech companies have been enthusiastic about participating in the UAE market for some years. When Indian payment infrastructure and software as a service fintech company Infibeam acquired Dubai-based Vavian International in 2018, it launched its digital payments business in the UAE, Oman and Saudi Arabia.
In January this year, Indian digital collections company Spocto chose the UAE for its first international office. The same month, Pine Labs announced that it had entered the market and would partner with local banks and financial institutions in the region to help them introduce fintech products. And in March, the Reserve Bank of India and the Central Bank of the UAE signed an MOU to promote innovation in financial products and services, technical collaboration and knowledge sharing on fintech matters.
The auto sector has been a hive of activity, too. In February 2021, TVS Motors announced a new distribution partnership with Public Motors in the UAE and opened a showroom in Dubai.
Deals have also been signed across the education and media sectors. “Indian companies are investing in the UAE’s education sector, given the country’s large expatriate population and growing demand for quality education,” says Gupta. “For example, Byju’s, an edtech company that offers online learning and tutoring services, expanded to the UAE in 2021 by launching its Middle East office, called More Ideas.”
More recently, the prestigious Indian Institute of Technology revealed plans to set up its first overseas campus in Abu Dhabi next year.
Less prominent but important businesses such as those in the food security industry have also benefited significantly from the CEPA, says Karim. “The food security space is one that has become specifically relevant in a post-covid world, where covid disrupted existing supply chains. Indian agricultural and food security businesses have profited in relation to supply to the UAE, with the incentives that CEPA has offered.”
Karim adds that Indian businesses in sectors such as advanced engineering, manufacturing and sustainable technologies are also making their mark in various free-zone clusters within the UAE, “the aim of which is to use the UAE as a springboard to the rest of the GCC [Gulf Co-operation Council] and Africa”.
Relationships between India and the UAE have moved beyond pure investment towards collaboration and knowledge sharing. The India-UAE Startup Corridor, an initiative established in May 2022 between the Federation of Indian Chambers of Commerce and Industry and the DIFC, is a prime example of this.
The initiative seeks to foster innovation and engagement among startups, investors, incubators, companies and entrepreneurs. The corridor aims to target a minimum of 50 validated startups based in India and the UAE over a five-year period with the vision to develop 10 of these into unicorns (a startup valued at more than USD1 billion) by 2025.
Hub71, a community of tech startups, investors, and government and corporate partners, backed by the government of Abu Dhabi and Mubadala Investment Company, has attracted noticeable interest from Indian entrepreneurs. In October 2021, Hub71 selected 14 startups at various stages of growth to join its new cohort, including its first unicorn, Cars24, India’s largest online retailer for used cars and the UAE’s largest used car retailer.
In addition to Cars24, Hub71 currently supports three other Indian startups. Mobility service startup Arcab provides alternatives to private and public transport in India using optimised routes, affordable transit, and travel in premium vans; Hafla, an artificial intelligence-based event ideation platform, recommends and sources venues, equipment, services and catering; and Funder.ai, a digital financing platform, helps small and medium enterprises and salaried personnel.
Abu Dhabi is working hard to entice more Indian startups, with Abdulla Abdul Aziz Alshamsi, acting director general of the Abu Dhabi Investment Office, encouraging fledgling businesses to use the UAE’s capital as a hub for international expansion. Alshamsi is particularly keen to bring in investment in Abu Dhabi’s priority sectors, which include financial services, healthcare, pharmaceuticals, tourism and agritech.
Beyond the UAE
Much of this report has focused on trade relationships between India and the UAE on account of developments related to the CEPA and the fact that the UAE, especially Dubai and Abu Dhabi, has taken the lion’s share of investment from India for decades.
However, India has cultivated strong ties with other countries in the region including Saudi Arabia, its fourth-largest trading partner and the country on which it relies heavily for oil, and Israel – which along with the UAE and the US has partnered with India to form I2U2, to focus on joint investments and new initiatives in water, energy, transportation, space, health and food security.
The UAE has been a primary destination for the Middle East operations of Engineers India, with the firm having created an engineering hub in Abu Dhabi providing services for hydrocarbon, water and waste water, and infrastructure projects in the Middle East. Outside the UAE, Engineers India has handled oil and gas mandates in Kuwait and Bahrain.
Indian investors such as Larsen & Toubro, Voltas, Shapoorji Pallonji, Wipro, Tata Consultancy Services and Tech Mahindra have flocked to Qatar to pursue opportunities in sectors such as IT, infrastructure and communications. Qatar meanwhile supplies 40% to 50% of India’s global liquified natural gas imports.
“The Qatari government has been actively seeking foreign investment to diversify its economy and reduce its reliance on oil, and Indian companies are among those looking to take advantage,” says Gupta.
“When you look around the region, it is clear that countries are taking foreign investment opportunities seriously and implementing strong action plans,” says Karim. “Examples of this can be seen in the Saudi Arabia’s Saudi Vision 2030, which outlines a plan for significant growth in the region that will require foreign investment and trade.”
Last October, Larsen & Toubro confirmed that its power transmission and distribution business had secured multiple engineering, procurement and construction orders to build transmission lines and substations in Saudi Arabia.
In February, consulting and business process management company Wipro committed USD110 million to expand its cloud studio service, develop digital healthcare solutions and support the development of local talent in Saudi Arabia. And in the same month, Tech Mahindra signed an MOU with Saudi Arabia’s Ministry of Communications and Information Technology to establish a data, artificial intelligence and cloud centre of excellence in Riyadh.
“Trade between the countries has been steadily rising since the mid-2000s and will likely be a strong beneficiary of the Saudi Vision 2030,” predicts Karim. Vision 2030 is the Saudi government’s ambitious project to reduce the country’s reliance on oil, create a more diverse and sustainable economy and develop its public service sectors such as health, education and tourism.
“As with any area that is growing at a rapid rate, there will be a significant period of change and uncertainty, which may deter some market entrants in the short term,” says Karim.
Gupta says some issues that may be of concern to Indian investors in Saudi Arabia include: onerous local partnership requirements in some sectors; strict labour laws, which mandate the hiring of a certain percentage of Saudi nationals, along with the provision of specific benefits and protections to employees such as health insurance and housing in some cases; and foreign exchange control regulations.
“The Saudi Arabian legal system is based on Islamic law, and can be complex and unfamiliar to foreign investors,” adds Gupta. “It is important to obtain expert legal advice to navigate local laws and regulations, and to ensure compliance.”
In recent years, bilateral trade between Israel and India has diversified, with investment ties made in sectors such as pharmaceuticals, agriculture, water, IT and telecoms.
Israeli companies have contributed their expertise and knowledge on water technology for many years, with entities such as IDE building desalination plants in India, Mekorot sharing its know-how with organisations in Mumbai and West Bengal, and the Tahal group working with the government of Karnataka to design, construct and operate a water supply system to 131 villages in the state. Last June, Israel and the Haryana government signed a joint declaration on integrated water resources management under which Israel pledged to assist with capacity building and cutting-edge water technologies.
Investments in traditional areas continue to be signed, too. In March 2022, Ola Electric invested USD5 million in Israeli battery technology company StoreDot to manufacture advanced chemistry cells and new energy systems in India. In the same month, Indian Potash signed an MOU with Israel Chemicals to secure a five-year supply of muriate of potash from 2022 to 2027. A few months later, in May, the government of Karnataka signed an MOU with Israel-based ISMC Analog Fab to set up a USD3 billion semiconductor plant in the state. And in October 2022, Centum Electronics announced a strategic partnership with Israel’s Rafael Advanced Defense Systems to collaborate on the development of electronic warfare systems for the India’s navy and coast guard.
Indian investments are less well established in places such as Yemen, Syria, Turkey, Palestine and Lebanon, which have endured conflict, political instability, poverty and natural disasters. While relations have been limited to the provision of humanitarian assistance, relief supplies and developmental programmes, stronger commercial ties could be forged in the near future.
Last November, Fayssal Mikdad, Syria’s minister of foreign affairs and expatriates, urged Indian companies to invest in Syria and assist with its reconstruction, while in Lebanon a specific framework was recently put in place for offshore drilling and exploration, to make legal and regulatory issues easier in the oil and gas sector, through a one-stop-shop approach.
“The promising new industries for India in Lebanon are clearly oil and gas, and IT,” says Elias Chedid, the managing partner of Chedid Law Offices in association with Dentons. Chedid believes more work is needed to boost investment, which “remains shy in comparison with the existing potential”.
“In terms of the IT sector, including ICT infrastructure, Lebanon needs a fundamental upgrade,” says Chedid. “India could play a key role in this and help take Lebanon to the next level.”
In 2006 and 2008, India and the GCC – comprising the UAE, Saudi Arabia, Bahrain, Oman, Qatar and Kuwait – tried and failed to negotiate a free trade agreement. Last November, after 14 years, the two sides announced they would return to the drawing board to resume dialogue.
These talks will be crucial to streamline trade between the GCC countries and India, particularly given that only the UAE is a party to the CEPA.
The GCC is currently India’s largest trading partner bloc, with bilateral trade in the 2021-22 financial year valued at over USD154 billion, exports valued at about USD44 billion, and imports estimated at USD110 billion (non-oil exports USD33.8 billion; and non-oil imports USD37.2 billion). Bilateral trade in services between India and the GCC was valued at about USD14 billion in the 2021-22 financial year, with exports amounting to USD5.5 billion and imports at USD8.3 billion.
Dempsey, of Eversheds, says positive steps have been taken across the GCC, “with a number of member countries recently issuing or revising their insolvency law regimes in addition to introducing a moveable pledge law complete with public registry to increase transparency”.
He adds: “Considering there is a large Indian diaspora in the GCC, we expect a lot of Indian investors to invest in Saudi Arabia, Kuwait and Oman in addition to the UAE.”
Foreign ownership rules and higher tariffs in various goods and services and difficulties with mutual enforcement of judgments could still deter Indian investors in other GCC countries. “A free trade agreement between India and the GCC,” says Dempsey, “would not only allow market access to Indian investors, but would also boost investor confidence through a robust dispute resolution mechanism.”