By: Sanoop Suresh, Research Analyst, GSDN

After Narendra Modi took the oath of office in 2014, India started a journey towards deeper ties with the United Arab Emirates, and the Indian Prime Minister visited the UAE five times in the eight years afterwards. When he made his maiden trip to the UAE in 2015, Modi became the country’s first prime minister to do so in 34 years. Modi’s visit to Abu Dhabi was well received, and the following year, the ruler of the UAE, HH Sheikh Mohamed bin Zayed Al Nahyan, paid a visit to India and later served as the chief guest at the Republic Day celebration in 2017. Over the past nine years, India and the UAE’s diplomatic and economic ties have expanded. According to official figures from the UAE, there are close to 3.5 million Indian nationals living there, making them the country’s largest ethnic group with almost 30% of the total population. As a result, the UAE is a significant player that India cannot afford to risk losing. Despite the hurdles that still lie ahead, Narendra Modi’s recent day-long visit to Abu Dhabi on July 15, 2023 offers signs of a win-win situation for both India and the UAE.

What is the outcome of this visit?

The Indian Prime Minister concluded his tour after attending various discussions on subjects ranging from economics to climate change by writing on his Twitter account, “India and UAE will keep working closely to further global good.” The main objective of the talks, according to the PMO’s official statement, was to further solidify the trade and economic ties between the two countries. In these discussions, both countries underlined their commitment to the promotion of robust and resilient food supply chains, and sought the possibilities of cooperation and diversification in the health sector. The discussion between the Indian Prime Minister and HH Sheikh Mohamed bin Zayed Al Nahyan, President of the UAE, also emphasized bilateral cooperation in the energy sector, including oil, gas, and renewable energy.  Additionally, both parties agreed to enhance investments across the board in the energy sector, including the Strategic Petroleum Reserve Programme of India. Both leaders called on the international community to preserve the long term goals of the Paris agreement and display their solidarity on “the principles of equity and common but differentiated responsibilities and respective capabilities, considering the diverse national circumstances of each nation”, as outlined in the agreement. However, the highlight of this trip was the signing of three MoUs between India and the UAE.

The tripartite Memorandum of Understanding agreed for establishing the first-ever IIT Delhi international campus in Abu Dhabi is a significant development of Modi’s visit to the UAE. In order to operationalize IIT Delhi-Abu Dhabi by January 2024 with a Master’s programme in Energy Transition and Sustainability, the Indian Institute of Technology (Delhi), Ministry of Education, and Abu Dhabi Department of Education & Knowledge (ADEK) signed the MoU. This is a follow up to the Virtual Summit between the two leaders, which occurred in February last year, when they agreed to establish the Indian Institute of Technology in the UAE. The Reserve Bank of India and the Central Bank of the UAE also signed two other Memoranda of Understanding on the same day, and it is expected that these agreements would fundamentally alter commerce between India and the UAE.

Why will these MoUs become a game changer?

Owing to the Comprehensive Economic Partnership Agreement signed on 18 February 2022, the UAE emerged as the third biggest trade partner in terms of USD $85 billion for the fiscal year 2022–2023 and the second largest export destination. With this deal, India was granted preferential market access for 97% of its tariff line in a number of industries, including pharmaceuticals, medical equipment, automobiles, jewelry and gemstones. The newly signed MoUs sought to better simplify business relations between the two nations. One among them calls for the collaboration of the Fast Payment Systems (FPSs) of the two nations, the Unified Payments Interface (UPI) of India and the Instant Payment Platform (IPP) of the UAE. It also seeks to connect their payment messaging systems as well as card switches (UNSWITCH and RuPay switches).

The second MoU pushes forward for greater cooperation in trade through establishing a mechanism to promote local currencies, which is Rupees and Dirham, for Cross-border Transactions by creating a Local Currency Settlement System (LCSS). According to this, exporters and importers would be able to invoice and pay in their respective home currencies, which would promote the growth of a foreign exchange market for the INR and AED. As transaction costs and settlement times are lowered, it is anticipated that a greater usage of local currencies will benefit Indians residing in the UAE in general and low-wage employees in particular. It should be noted that these initiatives coincide with India’s efforts to reduce its reliance on the US Dollar through extending the use of the INR.

At the Micro level, Banks from 18 countries, including the UK, Germany, Malaysia, Israel, and Russia, approved to open Vostro accounts for rupee trade, and Bangladesh, Sri Lanka, and Indonesia showed interest in local currency trade. India expects that such agreements will increase currency stability and minimize the volatility in international commerce relative to the value of the US dollar. On a macro level, the US dollar’s dominance is occasionally questioned, and more nations are attempting to trade in their own currencies to protect bilateral commerce from external fluctuations. Despite the fact that India and the UAE assert that there is no plan to “de-dollarize” the world economy by citing the bilateral character of this agreement, this initiative drives the efforts in that direction. Although this visit and the associated agreements can be seen as a step forward in India and the UAE’s relationship, it is also under the shadow of uncertainties and challenges.

Why isn’t it a straight road for India and UAE?

Although there is a leap in the India-UAE trade share as a result of the CEPA of 2022, the disparity in the Import-Export rate is considerably huge and these statistics raise some questions regarding the future of the India-UAE agreement on the use of local currency in bilateral trade. According to data released by the Indian Embassy in the United Arab Emirates, the value of bilateral commerce between New Delhi and Abu Dhabi surged by 68.3% in the fiscal year 2021–2022 compared to the prior year, totaling USD 72878.31 million. However, there is a 16,788.55 million USD deficit in Indian exports to the UAE. According to their most recent estimate, this disparity persisted in 2022–2023 between April and September with an imbalance of $12,341.51 million USD. This disparity leaves Abu Dhabi with an excess of INR and raises the question of whether this agreement will take the same trajectory as the debate over trade in rupees and rubles. To get around all of these concerns, India has to increase its share of bilateral trade, and New Delhi expects the CEPA will make that possible.

Another hurdle in their usually cordial relationship is the deadlock in their negotiations to revise the 2014 Air Service Agreement (ASA). The UAE ambassador to India noted that “it would be difficult to accommodate the new demands for travel between the two countries” unless India agreed to find common ground in modifying ASA. The Ministry of Civil Aviation expressed reluctance to expand the number of seats between UAE cities and around 15 Indian cities due to worries that it may hurt Indian airlines’ business, which led to a 45–50% spike in airfare in the nation’s major cities. Breaking through these impasses and locating a common ground is crucial to enhancing the connection between the two nations when we take into account the significance of India-UAE ties and the recent developments signal a more promising future for both countries.