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India & UAE: CEPA to Boost Bilateral Trade

The free trade agreement between India & UAE is to boost bilateral trade to USD 100 billion in the next five years. Duty elimination on over 99% of Indian exports to the UAE.

India and the United Arab Emirates (UAE) signed the Comprehensive Economic Partnership Agreement (CEPA) in February 2022, which aims to boost bilateral trade to USD 100 billion in the next five years from the current USD 60 billion. India has been a strategic ally of Saudi Arabia and the UAE among other countries in the Gulf Cooperation Council Countries (GCC) and the Middle East-North Africa (MENA) region since decades. With the growing focus on trade, investments and infrastructure in 2022, cross-border relationships have been brought back into the limelight as India continues to play a crucial role in the region’s post-pandemic economic recovery.

A unique positioning of the CEPA also comes from a whole chapter on digital trade, which is a first for India at the level of international trade negotiations. It covers areas like electronic digital invoicing, payments, personal data protection, cross border flow of information, digital identities, authentication, cyber security, online consumer protection, etc. An important point to note is that the current practice of not imposing customs duties on electronic transmissions between the two countries will stay.
 

Benefits for India and UAE

  • The partnership between the two countries has led to joint work on several agreements and Memorandum of Understanding (MoU) in several areas, including the economy, climate change and Houbara conservation, industries and advanced technologies, low carbon hydrogen developments, investments, food security, financial services, and issuance of India-UAE joint stamps.
 
  • The CEPA covers duty-free access to all labour-intensive sectors such as gems and jewelry, textiles and apparel, agricultural and fish products, leather, footwear, sport goods, pharmaceuticals and medical devices, many engineering products, etc. This will promote the development of new trade, investment, innovation dynamics, and intensify bilateral engagement in diverse areas.
 
  • The agreement’s emphasis on boosting opportunities for small and medium enterprises (SMEs) would help create more jobs in the sector.
 
  • The UAE has offered duty elimination on over 97% of its products, which accounts for 99% of Indian exports in value terms.
 
  • India currently exports about USD 26 billion worth of goods to the UAE, of which almost 90% is to get total tariff (or customs duty) elimination from Day 1, i.e., 1 May 2022.
 
  • The trade agreement will create 5 lakh jobs in India in the gems and jewelry, textiles, engineering, pharma and auto sectors, among others.
 
  • Tariff elimination on more than 80% of the goods that UAE exports to India.
 
  • UAE will be home to the first ever Indian Institute of Technology (IIT) campus outside India.
 
  • The CEPA provides for both countries to set up a technical council on investment, trade promotion and facilitation led by representatives of both governments, which would promote and monitor trade and investment flows between the two countries.
 
  • The UAE is a party to several regional and bilateral FTAs, including countries in the GCC. As part of the GCC, the UAE has strong economic ties with Saudi Arabia, Kuwait, Bahrain, and Oman and shares a common market and customs union with these nations. Under the Greater Arab Free Trade Area (GAFTA) Agreement, the UAE has free trade access to Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, Jordan, Egypt, Iraq, Lebanon, Morocco, Tunisia, Palestine, Syria, Libya, and Yemen. With the CEPA in place, India stands to benefit from these UAE connections.
 
 

Tariff Rates & Benefits for Indian traders


Infrastructure


Infrastructure output in India increased 5.8% year-on-year in February 2022, following an upwardly revised 4% rise in January. Infrastructure output refers to a combined index that measures the performance of Eight Core Industries: refinery production (weight: 28%), electricity generation (19.9%), steel production (17.9%), coal production (10.3%), crude oil production (8.9%), natural gas production (6.9%), cement production (5.4%) and fertilizers production (2.6%). Infrastructure accounts for nearly 40% of India's industrial output.

UAE is the 8th largest investor in India with an estimated investment of USD 18 billion. Moreover, India and the UAE have recently entered a Memorandum of Understanding (MoU) whereby the UAE has committed USD 75 billion towards infrastructure development in India.
 
Major Sector Custom Duty Before CEPA Custom Duty After CEPA
Infrastructure (including 8 Core Industries) contraction of 23.8% (during April – June 2021) Tariff eliminated
 

Oil and Gas


Crude oil consumption is expected to grow at a CAGR of 4.66% to 500 MMTPA by 2040 from 201.26 million tonnes in 2021. Oil demand in India is projected to register a 2x growth to reach 11 million barrels per day by 2045. India is the UAE’s number one trading partner for non-oil exports, accounting for nearly 14% of its non-oil exports.

Major Sector Custom Duty Before CEPA Custom Duty after CEPA
Petroleum products (crude, LPG, Naptha), petrochemicals (polyethylene, polypropylene and poly vinyl chloride), metals (aluminum, copper, nickel, iron and steel), minerals (limestone, cement). 12.2% during (April 2020) No concession
 

Pharmaceuticals


This industry is expected to reach USD 65 bn by 2024, and USD 120-130 bn by 2030 with a growth rate of 10%-12%. CEPA provides a permanent safeguard mechanism, which will safeguard exporters and businesses from both the countries from any unwarranted surge in volumes of any particular product. Several sectors, therefore, including medical devices and pharmaceutical products will benefit from the trade agreement.

The India-UAE drug market is estimated to be valued at USD 8.8 billion by 2029. UAE is known for rising health expenditure, inclination towards innovative drugs, and vigorous investments in healthcare infrastructure. The India-UAE trade pact will definitely augment exports; Indian exporters are likely to make substantial gains in labour-intensive sectors such as pharmaceuticals and medical devices.
 
Major Sector Custom Duty Before CEPA Custom Duty After CEPA
Pharmaceuticals 10%-15% Tariff eliminated
 

Textile


The market is expected to recover and grow at 10% CAGR from 2019-20 to reach USD 190 billion by 2025-26. India’s exports of Textile and Apparel (T&A) are expected to grow to USD 65 billion by 2025-26, growing at a CAGR of 11%. While the UAE, India’s third-largest export destination, currently imposes a 5% duty on textiles and garments and jewelry, certain steel products are taxed at 10%. These three segments alone made up 34% of India’s USD 16.7 billion exports to the UAE in the last fiscal year and 43% in the pre-pandemic year.
 
Major Sector Custom Duty Before FTA Custom Duty After FTA
Textile 5% No concession
 

Gems and Jewelry


India’s overall exports of gems grew at 69.13% year on year to USD 32.37 billion from April 2021-January 2022. India ranks first among the top exporters in cut and polished diamonds, and second in gold jewelry, silver jewelry and lab-grown diamonds. The Government reduced custom duty on cut and polished diamond and colored gemstones from 7.5% to 5%; and now to zero with the CEPA.

As of February 2021, India’s gold and diamond trade contributed 7.5% to India’s GDP and 14% to India’s total merchandise exports. The gems and jewelry sector is likely to employ 8.23 million persons by 2022, from 5 million in 2020. Based on its potential for growth and value addition, the Government declared the gems and jewelry sector as a focus area for export promotion.

The Government has undertaken various measures recently to promote investments and upgrade technology and skills to advance ‘Brand India’ in the international market. India has given tariff concessions on gold exports to the UAE, while they have eliminated tariffs on jewelry.
 
Major Sector Custom Duty Before CEPA Custom Duty After CEPA
Gems and Jewelry (Gold) 7.5% Tariff eliminated
 
 

Conclusion


The UAE is India’s third largest trade partner and bilateral trade is expected to surpass USD 60 billion in the current financial year. India also ranks as the UAE’s number one trading partner for non-oil exports, accounting for nearly 14% of the UAE’s total non-oil exports globally. Trade between the two countries is geared for a great boost with CEPA as the UAE has offered duty elimination on over 97% of its products, which accounts for 99% of Indian exports in value terms and there will be tariff elimination on more than 80% of the goods that UAE exports to India.
 
The sectors set to benefit include business services, telecommunications, construction and development, education, environment, financial sector, health services, tourism, hospitality, maritime and air transport services, among others. In addition to growing bilateral trade in goods to over USD 100 billion within the next five years, the deal is expected to boost trade in services to over USD 15 billion. The CEPA will provide a platform for small and medium enterprises in both countries to expand internationally by granting access to new customers, networks and avenues of collaboration.

 

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