Opportunities For UAE-Based Businesses In India: The New CEPA Trade Agreement
The UAE-India Comprehensive Economic Partnership Agreement (CEPA) came into force May 1, 2022. It is projected that by 2030, trade with India will add US$9 billion (1.7 percent) to the UAE’s GDP. UAE imports from India are projected to increase to US$7.6 billion (by 1.5 percent) and exports US$14.8 billion (3.8 percent).
The UAE has signed three trade agreements this year – with India, Israel, and Indonesia, respectively. The deals remove tariffs, duties, and customs besides introducing other market relaxations to boost bilateral trade and facilitate investments in each other’s economies.
Various memoranda of understanding (MoUs) have been signed between UAE and India under the CEPA. These include:
MoU between the UAE’s DP World and Al Dahra on a “Food Security Corridor Initiative” and India’s Agricultural and Processed Food Products Export Development Authority (APEDA).
MoU between Abu Dhabi Global Market (ADGM) and India’s GIFT City (IFSCA) on cooperation in financial projects and services.
MoU between UAE and India on Cooperation in the field of Industries and Advanced Technologies.
MoUs on climate action and in education. In 2023, the UAE will host COP-28 and India will host the G-20 summit.
UAE-India bilateral trade reached around US$72 billion in FY2021-22. The UAE is India’s third largest bilateral trade partner. 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-India CEPA is expected to accelerate growth of annual bilateral non-oil trade to US$100 billion in the next five years. The UAE hopes to boost its non-oil trade component through the trade agreement, which is essential to meeting its economic diversification targets.
Trade Impact After The UAE-India CEPA Came In Effect
The May-June 2022 data:
The UAE recorded a jump in oil and gold exports in the first two months since the CEPA with India came into force – in the May-June period. Consequently, the UAE benefitted from a trade surplus during this period worth US$3.92 billion, from US$980 million the previous year.
Indian exports to the UAE also reportedly rose – by 17.5 percent to reach US$5.4 billion. India’s exports to the Gulf state are mostly value-added and finished goods – textiles, gems and jewelry, machinery, footwear, automobiles, etc.
Treaty Provisions To Boost UAE Export Business
UAE exporters will benefit from greater market access in India through preferential tariff rates. The UAE-India CEPA will eliminate 80 percent tariffs on Emirati and Indian goods and all tariffs will be eliminated within 10 years. Overall, the UAE is eliminating duty on over 97 percent of its tariff lines, or 99 percent of Indian exports to the UAE in value terms.
UAE commodities like aluminum, copper, and petrochemicals will benefit from the removal of tariffs. An example of a UAE business seeking trade prospects in the Indian market is cable maker Ducab, which, according to chief executive Mohammed Al Mutawa “plans to supply cable and other metal products to the transport sector as well as mega infrastructure projects that are being built in India.”
To determine the tariff classification (HS code for the traded product), review the UAE government dashboard and find the tariff line description that best represents the product. From there, the trader can view the preferential tariff rate for their product and estimate the charges. Link to the HS dashboard can be accessed here: UAE Ministry of Economy.
The UAE-India CEPA also has a chapter on digital trade that covers scope for harmonizing digital trade and e-commerce between the two countries. This is important as India is projected to become the third largest online retail market in the world by 2030, with an estimated annual gross merchandise value of US$350 billion. E-commerce has been buoyed in both markets by the pandemic, besides high levels of internet penetration.
Finally, the UAE will have a tariff rate quota (TRQ) of 200 tons on gold exports to India where the tariff will be one percent less than whatever the tariff rate is charged for the rest of the world – in perpetuity. India imported 70 tons of gold from the UAE in FY 2020-21.
Benefits For Indian Exporters
Meanwhile, Indian exports, such as textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering goods, pharmaceuticals and medical devices, and automobiles, will get a major boost in terms of market access. Several key export items previously subject to five percent duty, such as readymade garments and jewelry, will benefit from tariff cuts. Certain regulatory relaxations have been allowed, such as in the pharma segment.
Indian traders will seek out competitive logistics and warehousing options in the UAE so the country can serve as a hub to sell further to third-country markets in West Asia, North Africa, and Central Asia.
Strict Rules Of Origin
The UAE-India 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 imports.
UAE Investments In India
The UAE is India’s eighth biggest foreign investor – responsible for cumulative foreign direct investment (FDI) worth nearly US$14.37 billion (April 2000-June 2022).
UAE investments in India are focused on five main sectors, namely, services (15.78%), sea transport (8.80%), power (8.34%), construction activity (infrastructure 7.15% and townships, housing, built-up infrastructure and construction-development projects 7.08%).
Leading UAE companies in India include:
DP World, a global supply chain solutions firm that has invests in inland container depots (ICDs), operating in terminals at Kochi, Mundra, and JNPT.
The conglomerate Sharaf Group, whose subsidiaries operate in the shipping and logistics sector – Hind Terminals Private Limited and Samsara Shipping Private Limited.
The retail conglomerate Lulu Group, which has announced INR 190 billion worth investments in India for malls, hypermarkets, food processing centers, and all related businesses. Lulu operates five shopping malls in India currently – at Kochi, Trivandrum, Thrissur, Bangalore, and Lucknow. The company’s business plans in India involve tapping into the rapid growth of tier-2 cities in the states of Karnataka, Andhra Pradesh, Tamil Nadu, and Uttar Pradesh.
Emaar Properties, which has a portfolio of properties in Gurugram, Delhi, Mohali, Lucknow, Jaipur, Indore, and Chennai. Emaar has developed over 11,500 residential and commercial units and are currently developing 8,500 units.
In June 2020, the UAE’s Mubadala invested US$1.2 billion into India’s telecommunications provider Jio Platforms. The year before, in 2019, UAE entities had committed US$7 billion to creating a food corridor between the UAE and India that benefited Indian farmers in the states of Punjab, Madhya Pradesh, Uttar Pradesh, and Gujarat.
I2U2 framework: In July 2022, a new quadrilateral forum was established called the I2U2, whose members are India, Israel, UAE, and the US. The forum identifies six areas of cooperation, namely water, food security, health, energy, transportation, and space.
Dr Aman Puri, Consul General of India in Dubai notes that the Emirates will be looking to “invest US$2 billion (Dh 7.3 billion) to develop a series of integrated food parks incorporating state-of-the-art climate-smart technologies to reduce food waste, conserve fresh water and employ renewable energy sources across India.” These investment plans are aligned with the UAE-India CEPA. Meanwhile, US and Israeli private sector expertise will be sought to ensure sustainability and innovation for I2U2 project investments. The food parks will benefit farmers, food processing businesses, and retailers.
Why UAE-based Businesses Should Consider The Indian Market
Strategic Location And A Large, Highly Accessible Market
A major investment hub in South Asia and well connected to central, west, southeast, and east Asian countries, India is a prime location for foreign multinationals. The country has doubled down on efforts to diversify its economy resulting in the prominence of its services sectors, boosted by ICT capabilities and English as the lingua franca. Moreover, the UAE hosts a large Indian diaspora population, at about 3.5 million whose presence across the Emirates fosters close bilateral trade and commercial linkages with India.
According to UNCTAD, India was the fifth largest FDI recipient in the world in 2020. This shows that as geopolitical events transpire, India is emerging as a reliable alternate destination for manufacturers and supply chain diversification due to its large labor and consumer base, low operating costs, and linkages to important international markets.
India has a strong economic track-record and is implementing reforms to liberalize market access and ease doing business. Most sectors are open to FDI; automatic investments are possible in sectors not restricted by the government while certain sectors are open to FDI but require government approval.
India has the world’s largest adolescent and youth population. It will continue to have one of the youngest populations in the world till 2030. The country has the third-largest group of scientists and technicians in the world. Household income is expected to rise 40 percent by the year 2030 and the number of households in India will continue to grow, reaching 354 million by 2030.
Business reforms have quickened the set-up process through single-window and electronic platforms. Respective Indian states compete to provide the most efficient turnaround of bureaucratic services, which can be a key market-entry consideration with regards to operating costs.
India offers the most competitive labor costs in Asia and state governments offer tax breaks to companies generating local employment in key sectors, like IT and manufacturing.
India is the seventh largest country in the world by land area. Land availability across the country is also being made transparent through an online GIS-based industrial land bank, which includes vacant plots and industrial parks.
Sectors in India that will be attractive for foreign investors for the next five years include financial services, e-commerce and logistics, electronics system design and manufacturing, automotive and electric mobility, healthcare and pharmaceuticals, food processing and agritech, power, telecom, and construction and infrastructure. A combination of factors prop up their market prospects and revenue potential – industry reforms and ease of doing business, mega infrastructure programs, competition between state governments to attract multinational firms, regulatory measures, incentives policies like the PLI Schemes to create indigenous supply chains and industrial ecosystems, vast domestic market whose consumer preferences are aspirational and liberal on one hand as well as impacted by religious and cultural factors on the other.
In the private sector, start-ups dominate the high growth entrepreneurship landscape – offering growth investment opportunities to UAE-based equity and venture capital firms. Education technology (edtech), financial technology (fintech), social commerce, and business-to-business (B2B) e-commerce segments have attracted tier-1 funds like Tiger Global, Sequoia Capital, Falcon Edge Capital, and SoftBank.
Setting Up A Business Entity
While setting up in India, foreign companies should choose an entity structure that caters best to their need. Selection of the right entity structure will help the company establish itself as a strong player in the Indian market and help them reap financial gains.
A foreign investor or company may set up as an unincorporated entity or incorporated entity in India. Unincorporated entities permit a foreign company to do business in India by establishing a liaison office, branch office, project office, or a trust. An incorporated entity, like a limited liability partnership, joint venture, or a wholly owned subsidiary is considered a separate legal entity and has a more structured setup.
Many foreign companies often choose the joint venture set up if they are unfamiliar with the market or find it challenging to navigate local market conditions. Learn more about how to choose the right option for structuring your India investments here.
Doing Business In India’s Digital Economy
India’s digital economy offers some of the brightest prospects with over 300 million internet subscribers. India has a significant and growing middle-class, presenting new opportunities for market penetration in areas like tier-2 and tier-3 cities for goods ranging from consumer durable goods to automobiles to healthcare besides digital services.
Recent reports project the Indian retail industry to grow around 10 percent every year over the next decade and be worth a massive US$2 trillion by the year 2032. For more information on selling to the Indian online market, see our article here.