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What Modi must do for India-UAE relationship to thrive

Modi UAE relationship Reuters
Narendra Modi with Abu Dhabi's Crown Prince Sheikh Mohammed Bin Zayed Al Nahyan: the target of $75bn of UAE investment in India remains a challenge
  • Modi claims victory in election
  • Protectionism a worry
  • Target of $75bn UAE investment in India

While Narendra Modi claims a rare third term as India’s prime minister, a raft of issues must be addressed for economic relations with the UAE to thrive.

Despite the strong foundations laid, experts highlight ongoing concerns such as bureaucratic red tape, protectionism, sluggish investment and trade growth.

The Modi-led Hindu nationalist Bharatiya Janata Party won the Indian parliamentary election on Tuesday, but failed to secure a majority on its own, as it has done in previous terms, forcing it to rely on allies to form a government.

The opposition coalition has yet, as of Wednesday lunchtime, to concede defeat.

India’s rapid economic growth under Modi’s leadership has been overshadowed by job shortages, rising inflation, an electoral bonds scandal and a divisive campaign, potentially alienating some voters.

“Policy engagement depends on the stability of the government,” Dr D Dhanuraj, chairman of the Centre for Public Policy Research, an independent public policy think-tank based in Kochi, Kerala, told AGBI

“As of now, it seems Modi will continue. India will continue with the latest foreign policy initiatives, as was the case during Modi 2.0.”

Viraj Solanki, research fellow at the International Institute for Strategic Studies in London, said achieving the target of $75 billion of UAE investment in India,  discussed since 2015, remains a challenge. 

So far it stands at $15.3 billion, and making up the shortfall will continue to be a focus in the new term, he said.

Solanki said Gulf sovereign funds and state-owned enterprises will continue to inject capital investments into India, but there are “clear indications” of delays in achieving the ambitious targets.

However, the continuity of a Modi-led government is expected to boost business confidence and help increase foreign direct investment from the UAE into India, Solanki said.

Levels of Middle Eastern oil supplies to India are also likely to rise in the medium term, which will increase bilateral trade, he said.

Aparna Pande, research fellow at the Hudson Institute in Washington, DC, said foreign investors are eager to invest in India due to its potential and as a viable alternative to China.

But for that to happen the administration needs to incentivise entry into more sectors, increase FDI limits and ensure tax and regulatory consistency, she said.

While India will benefit from more open trade, over the last few years it has become more protectionist than it was in the 1990s

Aparna Pande, research fellow, Hudson Institute

“While Indian policymakers understand the importance of global trade, when signing any trade and investment deals they seek to limit the pain while maximising the benefits,” Pande said.

“The Indian regulatory apparatus, despite the reforms of [the] 1990s and later, is still strong and slows down the implementation of almost every policy.”

An executive at Abu Dhabi’s sovereign wealth fund Mubadala has said that reducing red tape and improving execution timelines is critical to making India more attractive to global investors.

Pande said that while the India-UAE comprehensive economic partnership agreement, or Cepa, has the potential to transform India’s economy, it requires a new generation of land, labour and capital reforms, and easing up on protectionism.

The UAE and India “understand each other’s ambitions well” and “complement each other”, Pande said. 

“India can offer economies of scale and human capital, while the UAE is a leader in state-of-the-art technology and the investment to ensure both countries achieve their goals.

“While India will benefit from more open trade, over the last few years it has become more protectionist than it was in the 1990s.”

With a rising China and a semi-isolationist United States, “it is important for the UAE to have a strong relationship with a future global power – India”, Pande said. 

Similarly for India the Middle East is critical for its security interests, she said.

“Most of India’s energy supply comes from this region, and for India the Western Indian Ocean and Arabian Sea is important for national security.”

The PM’s “Make In India” campaign has aggressively pursued FDI to support domestic manufacturing.

Modi wants more investment from countries such as the UAE to boost India’s factories

But Zulfiquar Ghadiyali, managing director of Royal Arab Holdings in Abu Dhabi, the business arm of the private office of Sheikh Tahnoon bin Zayed Al Nahyan, said this week that the future of the UAE-India economic partnership also hinges on manufacturing taking place in the Gulf state.

Sanjeev Dutta, CEO of the UAE chapter of the UAE-India Business Council, said initiatives such as Bharat Mart, a new warehousing facility in the UAE similar to China’s Dragon Mart to allow Indian exporters to showcase their products, “balances protectionist measures”.

“Modi can balance [protectionist] policies by promoting joint ventures and partnerships, encouraging technology transfer, and investing in manufacturing facilities,” Dutta said.

Manjari Chatterjee Miller, senior fellow for India, Pakistan and South Asia at the Council on Foreign Relations, a New York-based think tank, said trade ties also needed to be diversified beyond the current focus on gemstones, jewellery and oil.

Stripping out oil, annual bilateral trade growth between India and the UAE has increased by just 2.5 percent in the 17 months following the Cepa.

“There has also been a decline of FDI into India that the Modi government will want to address,” she said.

Hannan Moti, co-founder at iCodejr, an online coding platform for students, which has business interests in India and the UAE, said resolving the ease of movement of money across borders is crucial for investment.

“The biggest challenges for overseas entities that leverage special purpose vehicles or onshore subsidiaries in India for local investments, is repatriation of cash,” he said. 

“It is by far the most cumbersome process, given that the Indian rupee is a restricted currency.”

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