India-GCC trade has huge scope for growth, says report

India and GCC are two major trading partners for decades but there is a still big scope for growth in the years to come, said a report.

 “With the economic forecasts pointing to strong GDP growth in both the economies, we emphasise that there is an ample scope of strengthening economic ties between GCC and India. While the GCC needs to promote more industrialisation and SME participation in order to realise its diversification dream and create jobs for its rapidly expanding population, India needs to further improve its basic infrastructure and reduce complexity in the regulatory practices”, said Sanjay Vig, Managing Director at Alpen Capital.

“We recommend GCC investors to further diversify their investment portfolio by taking positions in the promising Indian investment avenues as the return on investment remain relatively robust. At the same time, due to its locational advantage and abundance of natural resources, GCC has the potential to serve as a manufacturing base as well as an export hub for Indian companies,” he added.

Sameena Ahmad, Managing Director at Alpen Capital, said in the report that economic relations between India and the GCC date back to several centuries. However, the two-way trade between the two regions has strengthened over the last decade. This is particularly due to the substantial economic power attained by these regions on the global map following the spectacular economic growth since 2003.

“FDI investment from GCC to India has picked up pace in the recent years but remains negligible relative to trade flows in terms of magnitude. It also represents just a small percentage of total FDI from GCC countries to the world”.

Trade Inflows

Bilateral merchandise trade between India and the GCC has grown substantially over the last decade (CAGR of 35.9 per cent over 2001–10 to $88.8 billion). Trade intensity between the regions has also risen led by numerous bilateral trade agreements signed in the recent past. Although the trade relationship between India and the GCC remains largely concentrated around oil, other tradable items are also slowly gaining importance due to the latter’s diversification drive. Amongst the GCC nations, UAE followed by Saudi Arabia continue to remain the largest trading partners for India. Furthermore, the analysis of the development in services trade by both regions globally indicates the demand for India’s services is rising strongly in the GCC.

Capital Inflows

Apart from developing strong trade relationships, both regions have also been increasingly investing in each other’s economy to benefit from the attractive returns on investments. Diversification and spectacular economic growth recorded by both the regions over the recent decade have helped boost cross border investments.

FDI to India from GCC

Capital flows in the form of FDI from GCC to India have gathered pace in recent years, cumulating to $2.6 billion over April 2000 to January 2012. Accordingly, its contribution to total FDI inflows into India (on a cumulative basis) has increased from 0.6 per cent in 2005 to 1.7 per cent as of January 2012.

Although FDI from GCC to India has picked up in recent years, it remains negligible relative to trade flows in terms of magnitude and largely represents rising investments by expatriates.

Cumulative FDI investments (April 2000 to January 2012) represented less than 3 per cent of the annual bilateral merchandise trade flows reported in 2010. Except Oman and UAE, investments from other GCC countries into India remain negligible compared to their global investments. However, India has encouragingly stepped up efforts to attract investments by further relaxing regulatory restrictions and inviting GCC investors to actively participate in India’s robust growth story and benefit mutually. The power, services and construction sectors continue to account for the largest share of FDI inflows from the GCC to India.

FDI to GCC from India

Although India’s FDI participation in the GCC is growing strongly, there is potential for further growth as the total investment remains small in comparison to Indian investments in to the rest of the world. Software development and engineering services, tourism, readymade garments, chemical products, agricultural and allied services continue to generate majority of the interest from Indian corporates. Apart from these, a number of Indian companies have collaborated with national players in the areas of designing, consultancy, financial services and software development. Although India’s investments in the GCC have been largely driven by Non-resident Indians who had historically set up businesses in the region, businesses of Indian origin are also increasingly setting up footprint in GCC.

Opportunities for co-operation

Over the years, GCC has developed capabilities and experience in energy, telecom, construction, real estate and infrastructure sectors. These sectors are also growing fast and offer potentially attractive opportunities in India, which has strong expertise and scale in commercial services (financial, ITES) manufacturing, small and medium scale enterprises, food processing, and education, among others. The GCC is relatively lacking in these areas and increasingly looking for technological know-how, managerial expertise and foreign collaborations to build sustainable models for development. Growing Indian businesses could invest in several of high prospect avenues in GCC and use the region as a strategic hub to access regional markets in Africa, Iran, Iraq, and CIS countries amongst others.

As part of the diversification plan, the GCC is prioritizing export of high order goods (finished goods). Thus, Indian corporates could participate and use the GCC region as a re-export hub for their refining operations (value added products), mainly as the lower input cost and robust infrastructural support in the block offer favorable investment environment. Moreover, due to strong cultural, historical and bureaucratic familiarities, GCC nations believe the scope for cooperation with India is better relative to any other Asian economy (including China).

Recommendations

With ample funds available for investment, GCC sovereigns and companies should further diversify their portfolio mix toward high-growth markets such as India which are recording robust growth and offering sound investment returns.

Although the Indian government has undertaken a number of commendable steps to attract FDI, it still has to improve several factors to create a conducive investment environment in India including reducing restrictions on foreign trade regulations and eradicating bureaucracy.

While political stability and eradication of bureaucracy are warranted for investment attraction, the GCC region should establish a competent block level investment authority in each country which can impart transparency and guide investors toward potential investment avenues across the region. Official publication and databases should also be made widely accessible and regularly updated.

In order to realize its diversification initiatives, the GCC should further promote foreign industry involvement by relaxing regulations and encouraging SME participation which will create employment opportunities as well as increase GDP growth.

In order to promote investments from India, GCC governments and companies need to make frequent visits to the country, hold collaborative talks with Indian firms and the government as well as conduct road shows. GCC countries should also consider long-term visa schemes for investors to encourage participation and promote investments.

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