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14 Mar 2014

UAE and India on right track

Sunil Sanghai

by Sunil Sanghai

Managing Director and Head of Banking, India, HSBC

UAE and India on right track

About USD1 trillion is needed by 2018 to modernise India’s roads and railways

India’s trade relations with the United Arab Emirates date back thousands of years, to the barter of pearls for cotton and dry fruits for grains. Business ties have grown stronger after centuries of exchanging culture, commodities and ideas.

With the advent of crude oil in the second half of the last century and formation of the UAE in 1971, the relationship has become more robust on political as well as economic fronts. Many Indians moved to the UAE for work and today around 1.75 million make up 30 per cent of the total population.

After the global financial crisis of 2008, the Middle East started diversifying into non-oil sectors, paving the way for a new era of business ties with India and other Asian countries.

The UAE, which generates about 31 per cent of its GDP from oil, is now looking at India not just as a trade partner but also as an investment destination, with a focus on infrastructure.

About USD1 trillion of investment is needed by 2018 to meet India’s ambitions for modernising its roads and railways. The Indian government has already removed some limits on inward investment and is now planning further reforms to attract foreign capital.

Countries in the Middle East are among those keen to invest. In 2013 the UAE promised USD2 billion for infrastructure in India.  In 2012, foreign direct investment (FDI) projects from the Middle East rose 123 per cent on the previous year.

The UAE is now looking at India not just as a trade partner but also as an investment destination, with a focus on infrastructure

Trade between the two regions has grown fast, while direct investment into India from the UAE has remained relatively small. The trade between the two economies reached USD75 billion in 2012/2013, up from USD43 billion in 2009/2010. The UAE is now India’s top export destination, accounting for more than 10 per cent of its tangible exports.

Compare this with an estimated USD8 billion of UAE money invested in India. And a large proportion of this sum is held passively in company shares and other assets with only USD2.3 billion in the form of FDI.

Proposals for investments have faced challenges in recent years because of regulatory issues and a number of deals involving UAE businesses have been affected. 

But efforts are being made to improve investor sentiment and India and the UAE are keen to strengthen their economic ties. In May 2012, both governments set up a joint “high-level task force on investment” and in December 2013 signed a “Bilateral Investment Promotion and Protection Agreement” to encourage cooperation.

Forecasts suggest that the two countries have grounds to be confident. The rising aspirations of India’s middle class will require the government to invest heavily in sectors such as energy, roads, urban housing, railways, ports and aviation. Money from overseas will be needed and this is where companies from the UAE will have an important role to play.

The UAE is also expected to spend heavily on transport and logistics infrastructure in preparation for Expo 2020 in Dubai. This represents a new opportunity for Indian businesses with traditional exports such as mineral ore, textile and wooden goods likely to be replaced by transport equipment and chemicals.

India is expected to become the UAE’s biggest market by 2030, when it is forecast to account for an estimated 14 per cent of UAE’s total exports. Increased inward investment from the UAE could help India create conditions for long-term growth.

Over the next 20 years South-South relationships based on increased economic and strategic cooperation are expected to become more important to the world economy.  The relationship between India and the UAE could be a leading example – the two countries have been selected in the United Nations Conference on Trade and Development list of top 10 most promising investor economies for FDI from 2012 to 2014.

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