India-UAE trade deficit widens to USD 5 bn post FTA

Eight months into a free trade agreement with the United Arab Emirates, India’s trade gap with the Gulf nation has widened by more than $5 billion, lifted by elevated global crude oil prices and increase in non-oil trade.

While India’s exports to the UAE grew by 11% during this period to $20.25 billion, imports climbed 24.4% to $36.23 billion, data from the department of commerce showed. This caused a trade gap of $15.98 billion, compared to a deficit of $10.89 billion in the corresponding period last year.
India’s non-oil trade deficit more than doubled between May and December 2022 to about $2.2 billion from $1.01 billion a year earlier. The India-UAE comprehensive economic partnership agreement (CEPA) came into force on 1 May 2022.

India’s non-oil outbound shipments to the UAE grew by 2.59% to $15.03 billion, while non-oil inbound shipments jumped 10.03% to $17.23 billion during the May-December period.

An official in the department of commerce said CEPA utilization is “on an uptrend" and is only likely to increase further. Pointing at the increasing utilization of the free trade pact by Indian exporters, the official said the issuance of preferential certificates of origin (COO) under the CEPA increased from 415 certificates worth $133.2 million in May 2022 to 6111 worth $1.11 billion in December 2022.

However, while the import surge was largely led by high-value petroleum products and raw material shipments, exports have been led by double-digit expansion in gems and jewellery, electrical machinery and equipment, automobiles, cereals, etc., where India gained duty free access under the agreement. That, experts pointed out, was a good start.

“Significant duty benefits are accruing to Indian exporters under CEPA. This is a source of competitive advantage for Indian exports to the UAE. Actual utilization of statistical significance started in June 2022. Dedicated efforts have been and are being undertaken by the department of commerce to raise awareness. Regular industry interactions and continuous end-to-end handholding is being done to assist Indian exporters in leveraging CEPA...," said a commerce department official. He added that as the UAE is a transit hub, most Indian imports from the UAE happen under the World Trade Organization framework. Only limited products that fulfil the value addition criteria are sourced directly from the UAE under the CEPA.

The pact, negotiated in a record 88 days, was signed on 18 February. It is the first major free trade pact signed by the Narendra Modi-led government since it came to power in 2014 and is likely to benefit about $26 billion worth of Indian products that are subjected to 5% import duty by the UAE.

Ajay Sahai, DG and CEO, Federation of Indian Export Organisations (FIEO), highlighted that the rising trade deficit with UAE is primarily on account of large imports of petroleum and polymers. “In value-added segments of electronics, electricals, automotive, machinery, gems and jewellery, our exports growth has been remarkable. Of late, we have seen good growth in apparel, textile and leather footwear sectors," said Sahai.

While imports of crude oil surged 60% in April-November to $20.12 billion, imports of polymers were up 30% to $1.09 billion.

“The trade deficit has widened largely because of higher oil prices. Last year, prices were much lower. But after the Ukraine war, prices spiked and one of our major imports is oil. However, we can see that the crude LPG that we are importing from the UAE, we are re-exporting half of that in terms of finished products to the UAE. It’s contrary to intuition that oil and gas trade flows only one way," India’s ambassador to the UAE, Sunjay Sudhir, said in a recent interview.
The pact immediately eliminated duties for 90% of India’s exports in value terms to the UAE, covering sectors such as gems and jewellery, textiles, leather, and engineering goods among others.

Gems and jewellery exports to the UAE grew by 33% in May. It grew 18% during the June to December period to $3.38 billion. Electrical machinery and equipment exports expanded by 28% to $2.25 billion in the same period. While automobiles and cereals exports grew by 35% and 39%, respectively, that for machinery and electrical appliances expanded by 17% in this period.

Arpita Mukherjee, professor, ICRIER, said a high-tariff country like India will see a higher import bill once tariff is reduced. “However, we may gain through investment. Besides, the UAE is used as a transshipment hub. Exports may not be rising due to slowdown in key export markets," said Mukherjee.