The signing of the Comprehensive Economic Partnership Agreement (CEPA) with the UAE has ushered in a new phase of India’s global economic engagements. As has been the trend in recent decades, India and the UAE have signed a broad-based CEPA, whose coverage goes beyond a traditional free trade agreement (FTA) that included only trade in goods. In contrast, the India-UAE CEPA has a much wider coverage: it includes trade in services, investment, government procurement and the digital economy. This is the first bilateral trade and investment agreement signed by the Narendra Modi government and it marks the beginning of a hectic phase of negotiations for India as seven more such deals are being negotiated. These include the long-delayed agreements with the EU, Australia and Canada, and the Enhanced Trade Partnership with the UK.
The India-UAE CEPA has broken new ground in three significant ways. The first is that the negotiations for concluding the agreement took less than three months since they were initiated towards the end of September 2021 and concluded in December. This is indeed remarkable given that bilateral trade negotiations involving India have usually been very long drawn. Secondly, the agreement covers the widest possible array of subjects and includes areas like the digital economy and government procurement. These have never been present in any of the bilateral agreements that India has negotiated thus far. The third and an important aspect of the CEPA is that it marks a complete turnaround from the government’s deep-seated scepticism about bilateral FTAs. This mistrust was largely because the three CEPAs that India had signed with its East Asian partners, namely, the Association of Southeast Asian Nations (ASEAN), Korea and Japan, had not yielded the benefits that the government was looking for. India’s deficits on merchandise trade with each of these partners had progressively grown larger and were much higher than those existing before the agreements were signed.
In 2019, India had also walked out of the Regional Comprehensive Economic Partnership (RCEP), a mega-regional trade agreement of the 10-member ASEAN and its six FTA partners. A view that gained currency was that withdrawal from RCEP was an indication that India was taking a step back from the process of global economic integration. The India-UAE CEPA could change this perception about the country.
The value of the agreement would lie in its ability to not only reverse the declining trend of bilateral trade, but to also ensure its steady growth. Two-way trade between the countries had peaked at $75 billion in 2012–13, with India’s exports at over $36 billion. Over the next five years, total trade declined steadily and was below $50 billion in 2017–18. During this period, India’s exports fell by over $8 billion, while imports from the UAE had nearly halved. The fall in exports did not augur well for India, for the UAE is a major gateway to the Gulf and African continent and is, therefore, an ideal base from which it can expand its presence in a strategically important region. Reversing this slide in exports to the UAE was therefore essential for lending buoyancy to India’s exports.
Shrinking of trade can largely be explained by lower levels of exports of gems and jewellery from India and of crude oil from the UAE. Overdependence on these two product groups caused uncertainties in India-UAE trade and, therefore, there was a strong case for diversification of the trade basket in both countries. The newly minted agreement provides plenty of opportunities in this regard.
According to the government of India, the country’s first CEPA in the Middle East and North Africa (MENA) is expected to provide momentum to its exports from several sectors, including textiles, leather, footwear, pharmaceutical products and medical devices, and automobiles, among others. The government’s expectation is that the CEPA could help in increasing the total value of bilateral trade to over $100 billion within five years.
Besides these direct benefits, this CEPA could provide an impetus for strengthening India’s economic relations with other countries in the Gulf. The agreement could provide momentum to the discussions for a possible FTA with the Gulf Cooperation Council, the blueprint for which was agreed to between the two sides almost a couple of decades ago.
Finally, it must be pointed out that a free trade agreement with a country that is also a transshipment port can result in circumvention of imports from third countries. This, in other words, implies that a non-party can try to take advantage of the tariff reduction that has been extended to the UAE and unfairly gain access to India’s market, putting domestic players in considerable discomfiture. Implementation of a strong and effective set of rules of origin (RoO) is the way forward. Hopefully the two governments can agree on the RoO well before the CEPA becomes effective on May 1.
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU