India-GCC FTA: Preparing to take the crucial step

Only two rounds of negotiations have taken place between India & GCC and that too in 2006 and 2008 respectively. Hence, there is still a lot to sharpen the structure of this trade agreement. Further, these negotiations must also revolve around services as GCC has a lot to gain from India’s expertise in this sector.

• India’s exports to GCC in 2019 were recorded at US$ 40.8 billion, while during the pandemic, they declined to US$ 29.1 billion. Correspondingly, imports from GCC in pre pandemic period were at US$ 79.6 billion which dropped to US$ 59.3 billion in 2020. 
• The decline in bilateral trade between India and GCC from 2019 to 2020 is mostly due to significant reduction in trade for crude oil and natural & precious stones. For all other products in the basket, the bilateral trade more or less maintained its pattern during the pandemic.
• So far, only two rounds of negotiations have taken place, that too in 2006 and 2008 respectively. Hence, there is still a lot to be done to fine tune the structure of the proposed India-GCC trade agreement. Just negotiating or reducing the tariff rates won’t fetch significant benefits to the concerned economies.
• It is extremely important for India to include services in this trade agreement as well. India’s services exports under mode 3 and mode 4 will be a vital route for ICT, business services, education, medical tourism, audio visual services, banking, and hospitality.

File photo of Indian PM Narendra Modi with businesses from the GCC Region; Source: PIB

India’s last trade agreement signed was with ASEAN on services trade in 2014. Since then, the county is yet to conclude any new trade agreement, though, there are several trade agreements under negotiations such as India-USA, India-EU, India-GCC etc. 

This blog examines how India-GCC (Gulf Cooperation Council) trade agreement can bolster India’s trade with Middle East economies in near future. As per reports, India is reconsidering a revival of trade negotiations with GCC countries, which had got stalled in 2008.

One interesting fact to observe is that, although currently India does not have any specific/regional trade agreement with any of the Gulf countries, it has a robust trade engagement with them. To elaborate, India’s bilateral trade figures with GCC stood at US$ 88.5 billion in 2020, making it 13.76% of India’s trade. 

With ASEAN, this figure stands at 11.44% even after having a comprehensive trade agreement including services, technology and IPR (intellectual property rights) under the framework. Moreover, if the trade agreement with GCC is concluded, the quantum of benefits seem to be significant as a more liberal trade framework will be worked out as opposed to practicing MFN rates. 

Looking at the bilateral trade

India-GCC trade agreement can help in proliferating the bilateral trade between these two partners. India’s exports to GCC in 2019 remained at US$ 40.8 billion, while in 2020 they dropped to US$ 29.1 billion. Our imports from GCC in pre pandemic period were US$ 79.6 billion which truncated to US$ 59.3 billion during the pandemic period. The decline we see in the bilateral trade between India and GCC is mostly due to significant reduction in trade for crude oil and natural & precious stones. For all other products in the trade basket, the bilateral trade more or less maintained its pattern. Top exported products of India to GCC include agricultural products, marine, meat, textiles, ceramic tiles, pharmaceuticals and mid segment cars:

Source: ITC Trade Map

On the other, top imported products by India from GCC are petroleum, precious metals, fertilizers & so forth:

Source: ITC Trade Map

Having a comprehensive approach

With India-GCC trade agreement coming into implementation, an initial liberalisation will be realized in the tariff framework when MFN rates will be replicated by preferential rates in most of the tariff lines. This will give a strong push to trade figures. So far, only two rounds of negotiations have been taken place, that too in 2006 and 2008 respectively. There is still a lot to be done to fine tune the structure of this trade agreement.

Just negotiating or reducing the tariff rates won’t fetch significant benefits to the concerned economies. According to one of the studies done in 2017 (Arora N, Mohajeri P), using computable general equilibrium model, India will experience a net loss while GCC will benefit from this trade agreement. Henceforth, it is extremely important for India to include services in this trade agreement as well. India’s services exports under mode 3 and mode 4 will be a vital route for ICT, business services, education, medical tourism, audio visual services, banking, and hospitality. 

Presence of the Indian diaspora in GCC is significantly visible as many professionals prefer to work in most of the six nations of the GCC. But if we formally negotiate and frame the services export’s dictum under this trade framework, there will be certainty and obligation in the labour mobility. Thus, this route will help India in earning FOREX through services exports. 

It is crucial to know that GCC is already having a trade agreement with European Union. This clearly gives competition to Indian merchandise exports mainly for textiles, F&B, pharma, automobiles and electronics products. Therefore, it sounds pragmatic that India might be on the losing end if only merchandise goods are considered for the trade agreement with the purpose of tariff reduction. We suggest policy makers to include services trade, harmonization of non-tariff measures and cooperation on technology and to make it a comprehensive trade agreement.