India-UAE CEPA: Key Gains for Exporters, MSMEs, Business Travelers

28/02/2022    70

We briefly examine contents of the speedily finalized India-UAE CEPA and identify key beneficiaries of the trade deal. The CEPA will come in effect in less than 90 days and aims to grow two-way annual trade to US$100 billion – up from US$60 billion – in the next five years. At the outset, elimination of the UAE’s five percent import duty on US$26 billion worth of products will significantly boost local industries in India. Meanwhile, the UAE will enjoy duty free access to 90 percent of India’s exports. The pact has also introduced a liberalized visa regime that includes a three-year visa for intra-corporate transferees and a 90-day visa for business visitors and contractual service suppliers.

On Friday, February 18, India and the United Arab Emirates (UAE) finalized their trade deal over a virtual summit meeting between Prime Minister of India, Narendra Modi and H.E. Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi.

Bilateral trade and investment – current status

India is the UAE’s second largest trade partner, accounting for nine percent of the UAE’s total foreign trade and 13 percent of non-oil exports. The UAE is India’s third largest bilateral trade partner. India-UAE bilateral trade is expected to surpass the US$60 billion in the current financial year.

The UAE is India’s eighth biggest foreign investor – responsible for cumulative foreign direct investment (FDI) worth nearly US$11 billion.

In June 2020, for example, UAE’s Mubadala invested US$1.2 billion into India’s telecommunications provider Jio Platforms. In 2019, UAE entities committed US$7 billion to create a food corridor between the UAE and India to provide a stable market for Indian farmers in Punjab, Madhya Pradesh, Uttar Pradesh, and Gujarat. On the other hand, India’s Reliance recently announced an investment of US$2 billion in Abu Dhabi’s TA’ZIZ Industrial Chemical Zone.

Sector-wise, future UAE investments in India are expected to target healthcare, infrastructure, and renewable energy. For example, projects in green hydrogen, climate action, start-ups, skilling, fintech, and healthtech.

Timeline of India-UAE CEPA

Officially known as the Comprehensive Economic Partnership Agreement (CEPA), the pact was concluded after just 88 days, a record time for trade negotiations. It will come in force in less than 90 days, by early May. Over the next 60 days, the UAE is set to complete its constitutional and legal process to implement provisions of the pact.

Goals of the India-UAE trade pact

The CEPA is expected to accelerate growth of annual bilateral non-oil trade to US$100 billion in the coming five years, as per a statement from the Indian Prime Minister’s Office.

Benefits of the CEPA is expected to impact about US$26 billion worth of Indian products that are currently subject to an import duty of five percent by the UAE.

There has been a lot of positive sentiment – from the start – around the negotiations for the CEPA, whose rapid culmination indicates the importance given to the trade partnership on both sides.

Besides the trade deal, various memoranda of understanding (MoUs) were signed between Indian and UAE entities during the virtual summit:

  • an MoU between India’s Agricultural and Processed Food Products Export Development Authority (APEDA) and the UAE’s DP World and Al Dahra on a “Food Security Corridor Initiative”; and

  • an MOU between India’s GIFT City (IFSCA) and Abu Dhabi Global Market (ADGM) on cooperation in financial projects and services.

MoUs were also signed on climate action and in education. In 2023, India will host the G-20 summit, and the UAE, COP-28.

Below we briefly highlight key aspects of the India-UAE CEPA and who could be major beneficiaries.

India-UAE CEPA: What’s in it for trade and business?

Tariff cuts

The India-UAE CEPA will eliminate 80 percent tariffs on Indian and Emirati goods and all tariffs will be eliminated within 10 years. The pact will give the UAE zero duty access to 90 percent of India’s exports to the country.

UAE commodities like aluminum, copper, and petrochemicals are set to benefit from the removal of tariffs, according to the UAE Minister of State for Foreign Trade Thani Al Zeyoudi.

Major win for export-oriented manufacturing, service sectors

The CEPA will benefit India’s labor-intensive industries, such as textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering goods, pharmaceuticals and medical devices, and automobiles. The services sector segments to benefit from the pact include computer-related services, audio-visual, education, health, tourism, travel, nursing, engineering, and accountancy.

For the pharmaceutical industry – the India-UAE CEPA provides for automatic registration and marketing authorization of Indian generic medicines in 90 days – once they are approved in any of the developed countries, such as USA, EU, UK, and Japan.

Cumulatively, over the next five years – the tariff liberalization and expanded market access could result in bilateral trade reaching US$100 billion and creation of one million jobs.

Liberalized visa regime for Indians

Under the India-UAE CEPA, the UAE has agreed to a three-year visa for intra-corporate transferees and a 90-day visa for business visitors and contractual service suppliers from India. The 90-day visa for contractual service suppliers can be extendable.

Strict rules of origin

The India-UAE CEPA has strict rules of origin in the pact to prevent products manufactured in third countries to take advantage of the CEPA route via UAE.

Rules of origin in the pact mandate 40 percent value addition / substantial processing of up to 40 percent on export items besides a certificate of origin issued by the UAE Ministry of Economy.

The CEPA also includes a permanent safeguard mechanism, which can be resorted to in case of a sudden surge in Indian imports.

These stringent provisions and safeguards follow India’s experience with the ASEAN FTA and to avoid ballooning trade deficit.

Items on the CEPA negative list to protect PLI schemes, sensitive sectors

The CEPA contains a special exclusion list to protest domestic producers.

India’s commerce secretary BVR Subrahmanyam clarified that manufacturing sectors wherein the government has rolled out production-linked incentive (PLI) schemes are put on the negative list in the trade pact. To protect sensitive sectors, India has kept certain segments out of the ambit of the CEPA. These include dairy, fruits, vegetables, cereals, tea, coffee, sugar, food preparation, tobacco, petroleum waxes, coke, dyes, soaps, natural rubber, tires, footwear, processed marbles, toys, plastics, scrap of aluminum and copper, medical devices, TV pictures, auto and auto components and sectors under the PLI scheme.

Prospects for entrepôt trade

Indian exporters are also hopeful of greater access to the UAE’s neighboring Gulf markets like Saudi Arabia, Bahrain, Kuwait, and Oman, other Middle East and North Africa countries, European markets, and Commonwealth of Independent States (CIS) markets as Dubai is a renowned trade entrepôt hub.

UAE economic growth prospects to attract businesses

By 2030, the CEPA with India could add US$9 billion (1.7 percent) to the UAE’s GDP. Exports are expected to increase to US$7.6 billion (by 1.5 percent) and imports to US$14.8 billion (3.8 percent).

Tapping the Emirati market offers huge prospects to Indian traders and manufacturers. This is more so as the country acts as a regional financial and economic hub due to its relatively liberal social environment. A spate of recent regulatory reforms has sought to attract foreign investors.

The UAE offers investors more than 40 multidisciplinary free zones, in which expatriates and foreign investors can have full ownership of companies and enjoy 100 percent repatriation of capital and profits, 100 percent exemption from corporate and income taxes, and 100 percent exemption from customs duty. These zones are characterized by efficient infrastructure and services to facilitate smooth workflows.

Meanwhile, under the pact, the UAE is committed to issue 140,000 employment visas to highly skilled Indian professionals by 2030. Over three million Indians currently work in the UAE and send home annual remittances worth billions of dollars.

Indian apparel exporters to gain access to wider markets

The CEPA cuts five percent import duty on Indian readymade garments. India’s apparel exports to the UAE currently amount to US$1.51 billion, about 43 percent of the Emirate’s total US$3.51 billion worth imports.

Market boost for Indian jewelry exporters

Indian jewelry exporters will get duty-free access to the UAE, which currently imposes a five percent customs duty on such products. Indian designed jewelry already enjoys good market reputation, and the CEPA tariff elimination will expand its export reach. India’s gems and jewelry sector wants to increase its exports to US$10 billion by 2023.

Gold imports

India has agreed to concessional import duties on gold imports of up to 200 tons per year; India imported 70 tons of gold from the UAE in FY 2020-21. This means the UAE will have a tariff rate quota (TRQ) of 200 tons where the tariff / import duty will be one percent less than whatever the tariff rate is charged for the rest of the world – in perpetuity.

Chapter on digital trade included

The CEPA includes a chapter on digital trade, the first time for India when signing a trade agreement. It covers scope for harmonizing digital trade and e-commerce between India and the UAE. Digital trade will cover areas like paperless trading, personal data protection, and cross-border flow of information. Dispute settlement provisions will not apply to this chapter.

Meanwhile, India is currently negotiating on the subject with EU, Australia, the UK, and Canada.

Setting up an IIT in UAE

Under the trade pact, it was agreed that the UAE will be home to the first ever Indian Institute of Technology (IIT) campus outside India. A joint UAE-India vision statement said: “Confirming the historical relations existing between the two countries and realising the need to establish world-class institutions that encourage and support innovation and technological progress, the leaders agreed to establish an IIT in the UAE.”

What Indian stakeholders are saying

India’s Union Commerce and Industry Minister Piyush Goyal stated the CEPA’s balanced, fair, and comprehensive scope allowed for an equitable partnership agreement, offering enhanced market access for India in both goods and services. Goyal said: “It will create jobs for our youth, open new markets for our startups, make our businesses more competitive [and] boost our economy.” Goyal also highlighted the agreement’s strategic advantages: “Since UAE functions as a trading hub, the Agreement will help provide us market entry points to Africa, Middle East and Europe”.

Meanwhile, India is also working to reach similar economic partnership agreements with Gulf Cooperation Council (GCC) countries in 2022 itself – with the GCC Secretary-General also sharing this desire to fast-track negotiations. The GCC is a union of six countries in the Gulf region, namely, Saudi Arabia, UAE, Qatar, Kuwait, Oman, and Bahrain with a combined nominal GDP of US$1.6 trillion.

The Federation of Indian Export Organisations President A Sakthivel expressed enthusiasm for Indian export prospects to the GCC region as the six countries apply “the same technical standards as applicable to the UAE”. He further said that the India-UAE CEPA could thus be “used as a template for similar agreements with GCC countries”.

The Council for Leather Exports Chairman Sanjay Leekha pointed out that the UAE could give Indian exporters access to certain EU countries and Africa.

Plastics Export Promotion Council of India (PLEXCONCIL) Chairman Arvind Goenka remarked on the multifold growth prospects for trade in plastics and potential to create about 200,000 jobs. India imports US$800 million in plastics from the UAE; India’s total imports of plastic raw materials amount to US$14 billion. Overall, Goenka is expectant that MSMEs will emerge as big winners from the trade deal since the availability of cheaper raw materials and preferential import duty by India will enable them to better compete against cheap imports of finished plastic products. India’s plastic exports could thus rise by at least 300 percent by 2023-24, he said.

Source: India Briefing