For the GCC and India, escalating opportunities
Daily Star, Beirut
For the GCC and India, escalating opportunities
By N. Janardhan
10 January 2006
Regional economic diversification received a boost when the Gulf Cooperation Council (GCC) and India - which signed a bilateral framework agreement for economic cooperation in August 2004 - announced that final negotiations for a free-trade agreement (FTA) would start this month, to thrash out niggling issues like rules of origin and differential tariffs.
In emulating the United States and European Union policy of expanding trade ties beyond the immediate region, the GCC - whose trade among the six countries only doubled in 12 years from $7.5 billion in 1990 to just over $15 billion in 2002 - concluded an FTA with Lebanon - the first with an Arab country. Apart from the U.S., FTA plans exist with the EU, China, Australia and the like.
India too has embarked on an economic diplomacy mission with negotiations on an FTA with the members of the Association of Southeast Asian Nations, affirming commitment for a South Asian Free Trade Area and stretching it to the GCC. On the anvil are FTAs with South Korea and Israel, economic engagement with the Bay of Bengal Initiative for multi-sectoral Technical and Economic Cooperation countries, a proposed Comprehensive Economic Cooperation Program Agreement with Mauritius and a unilateral tariff preference scheme for the least-developed African countries.
The push for GCC-India FTA talks come amid Indian Prime Minister Manmohan Singh’s statement that "[O]ur neighbors should have a greater stake in our economic growth and should benefit from it ... The Gulf region is a part of our natural economic hinterland."
With India’s economy forecast to expand about 7 percent during the current fiscal year, India’s proposal for an "Asian Community" implies creating an arc of advantage to rival the EU. While FTAs appear to reduce the efficacy of the World Trade Organization (WTO), they may actually help remove impediments to movement of goods and services and make the WTO more beneficial.
The FTAs are in line with New Delhi’s "Asian Century" policy adopted in the 1990s. India believes that an Asian economic community would help a huge but integrated market accounting for more than half the world’s population and having foreign exchange reserves in excess of the EU and North American Free Trade Agreement together.
While energy is forcing Asia to first look toward the Gulf, it is oil again that is engaging the GCC countries with Asia. The GCC countries account for 45 percent of the world’s recoverable oil reserves and 20 percent of the natural gas resources. Partly as a result of the September 11, 2001, attacks, and partly as a result of the surge of Asian economies, the East is the Gulf’s preferred market. Asia imports more crude oil than any other region in the world and it is the single most important market for GCC producers. Over the next five years, half of the incremental global oil demand will come from Asia. The GCC countries are also looking toward Asia because they find that the suspicion and scrutiny that greets Arabs in the West is increasingly an obstacle to do business.
Already ranked sixth in global petroleum demand, India meets 70 percent of its energy needs through imports. By 2010, it is projected to replace South Korea and emerge as the fourth-largest consumer of energy - after the United States, China, and Japan. The bulk of supplies in the past have come from the Gulf and this can change only marginally.
Beyond oil, as part of the new "look East" policy, the GCC chambers of commerce and industry called for prioritizing economic cooperation with Asian countries. The impact of the GCC granting the "dialogue partner" status to India - the first from the developing world and only the fourth partner in the world after the U.S., EU and Japan - is indicative of the dynamic change.
GCC-India relations are strong, given historic links, the presence of about four million Indians in the region and more than $5 billion in annual remittances. As a group, the GCC is India’s second largest trading partner, the largest single origin of imports into India, and the second largest destination for exports from India. Bilateral trade rose to nearly $20 billion in 2004, excluding energy imports by India worth approximately another $20 billion. Though both sides are beginning to see eye-to-eye politically as well, trade will remain the bedrock of their ties.
Both parties stand to benefit from an FTA as it will remove restrictive duties and push down the tariffs on goods being traded between them. Though Oman and the U.A.E. are in the advanced, and Kuwait in the preliminary, stages of negotiations with the U.S. for FTAs, all the GCC countries claim to be committed to collective rather than bilateral negotiations with trade partners. The same is the case with India. However, in trying to avoid discontent such as the one involving Saudi Arabia and Bahrain over the latter’s FTA with the U.S., Article 7 of the framework pact states: "Without prejudice to the provisions of the GCC Charter and those of the GCC Economic Agreement, this agreement and any measures taken hereunder, shall in no way affect the authority of the GCC countries to individually undertake bilateral activities with India in the fields covered by this agreement or conclude bilateral agreements with India."
With the GCC-India trade showing a remarkable surge in recent years, speedy and successful FTA negotiations would lead to more intensive economic engagement. Leading up to the final talks, a joint commerce and trade committee has defined the contours of an FTA by focusing on exploring opportunities in areas of oil and gas, petrochemicals, fertilizers, power, metals and pharmaceuticals, knowledge-based products, education, health, banking, avoidance of double taxation, a treaty to promote and protect investment, and infrastructure (India plans to build about 28 new airports), among others. There is also tremendous scope in areas such as tourism, biotechnology and higher education, as well as getting India’s expertise in the small and medium enterprises sector.
India could be an important source of semi-finished products, which can be improvised and packed by the GCC countries as a way of enhancing domestic trade. But the more conventional approach of viewing India as an extension of the GCC markets and not as an investment destination has to change.
The transformations in India will make it an industrial and scientific power. That, combined with availability of cheap and skilled labor and assured political stability, should make India the most favored destination for investment. India also has the potential to help the Gulf countries keep pace with the desired ambitions and goals, especially in the IT sector. The fact that India will cooperate on the basis of equality and mutual respect is a bonus.
Long-term demographics are in favor of the GCC and India. Only if both ensure pragmatism, flexibility and dynamism, will trade relations - with focus on commodities with potential for growth and mutual interest - develop in a manner commensurate with the potential. As both eye partners, it is natural that both look at each other to restore Asia to its rightful place.
N. Janardhan is editor of Gulf in the Media at the Gulf Research Center in Dubai. THE DAILY STAR publishes this commentary in collaboration with the center.
