Gulf Cooperation Council

Biz@India

Jan-Feb 2015

Gujarat has had a long history of thriving trade relations with the Middle East, notably the GCC countries, as the state has served as the main trading hub. As the economies evolve, the mix of business is changing as well.

With its textile, jewellery as well as artisanal industry dating from centuries, Gujarat has been a major trading centre in India, and its products have found buyers across the world. The linkage between Gujarat and the Gulf Cooperation Council countries has been even more direct and stronger as historic ports in the state have served as the main gateway to the outside world and notably the GCC countries.

India’s oil imports from GCC countries has been rising steadily

In the modern day, the state’s links with the GCC have become stronger as Gujarat has become one of the largest crude oil refiners in the world, home to nearly 30 pc of India’s total refining capacity, with over 66.7 million metric tonnes being refined by the state’s refineries and the state has set itself the target of more than doubling this figure in the current decade.

During Vibrant Gujarat, two of the six GCC nations, viz the United Arab Emirates and Bahrain, will be in focus as the main programme has Country Seminars on these two nations, emphasising the rapidly evolving relations between the GCC nations in general with Gujarat.

Almost 75 pc of the entire oil refined in Gujarat comes from GCC countries, notably Saudi Arabia, the UAE & Kuwait and this business has become a very significant part of not only Gujarat’s but the India’s trade with the GCC nations. Few realise it but the GCC as an entity is by far the largest trading partner for India, way ahead of the European Union, China and the United States. In 2012-13 the total trade, including oil and gas, between India and the GCC countries stood at $181 billion, while the trade with the EU was less than $100 billion and that with the US at only $65 billion. Within the GCC, too, the share of the trade of the two largest economies, the Kingdom of Saudi Arabia and the United Arab Emirates, is more than 65 per cent. The UAE was India’s top trading partner in 2013 with a total trade of $74 billion, while the KSA emerged as the fourth largest trading partner of India, with $43 billion. India is the third largest trading partner of the GCC, behind the EU and Japan.

What has been comforting for India is that the rate of growth of its trade with the GCC has outstripped that of other countries. India-GCC trade grew more than 770 per cent between 2005-2012. This is, of course, partly explained by the oil and gas prices rising sharply from their lows of around $10 a barrel at the turn of the millennium to the current average of $60 a barrel. But oil and gas prices do not explain the entire story of India-GCC or even Gujarat-GCC trade.

While the traditional Indian exports to the GCC like agriculture and food products, gems & jewellery, textiles and machinery, the imports have largely been crude oil, minerals, metals, plastics etc. Gujarat is an important source for many of these items including gems & jewellery, textiles and a major importer or consumer of crude oil. However, the trade basket is evolving. Over the last several years, India has been able to capitalise on its strong capabilities in the ITenabled services sector to increase its share of services exports globally. Though overall amounts are not available, according to industry estimates India’s IT products and services exports to the GCC countries are substantial and have been increasing at a growth rate of above 30 per cent annually during the past decade.

Energy at the heart

As Indian economy continues to grow, so do the country’s energy requirements, which are still mainly dependent upon the GCC countries and the country’s overall dependence upon imports is set to flare up from the current 70 per cent to almost 92 per cent by 2030. India’s oil imports from GCC countries as a proportion of its total oil imports has been rising steadily growing from 1190 barrels per day in 2001-02 to 1604 barrels per day in 2011-12. Also, India’s oil imports from the GCC countries as a proportion of its total hydrocarbon imports are already the highest amongst all oil importers from the GCC countries. And if the GCC currently accounts for about 50 per cent of the total oil imported by India, this percentage is expected to rise to well above 75 per cent by 2030. Besides oil, the GCC is also the source of most of the natural gas imported by India, with Qatar taking a commanding share of this commodity.

The bilateral trade is also helped by the fact the GCC countries are home to the largest concentration of the Indian diaspora, numbering over 7 million, or a quarter of the global Indian diaspora. As Indians now account for nearly 40 pc of the total expatriate population in the GCC, it opens up a new vista for business between the two. The first and most high profile impact is seen in the remittances sent home each year by the Indian diaspora here and which account for over USD 38 billion or nearly 55 per cent of the USD 72 billion that India received in remittances last year. A number of persons living in the Middle East, notably the UAE , Qatar and Oman are from Gujarat, with some of the wealthiest Indian families in the GCC hailing from the state.

But it is far from being a oneway traffic. With the GCC countries firming up projects worth USD 450 billion in 2014, Indian investors have huge opportunities for investment in knowledge and skill based services, particularly in the Information Technology. Qatar, UAE and Kuwait are expected to implement projects worth more than USD 70 billion, USD 85 billion and USD 70 billion respectively in 2014, says R Seetharam, chief executive officer of the Doha Bank Group in Qatar.

“GCC is expected to attract USD 57 billion into petrochemical industry over the next five years. The growing demand for healthcare services coupled with regulatory changes and emphasis on quality healthcare makes the GCC huge potential for the Indian Healthcare companies,” he wrote recently. He said Qatar planned to spend more than $1 billion in next five years to build and equip hospitals and medical facilities in the kingdom. “India and GCC nations can harness strong energy relationship by extending their partnership to manufacture valueadded products such as refining, petrochemicals, plastics, fertilisers and pharmaceuticals,” he said. “Indian investors in turn have huge opportunities for investment in knowledge and skill based services in GCC, particularly in fields like IT. With greater emphasis on education sector and push for scientific research facilities in the GCC, universities and research institutes from India can use their expertise and the market opportunities to expand in the region,” he wrote.

India-GCC Investment Opportunities

Though several companies from the GCC countries have been investing in India for many decades, the trend has reversed over the last few years as a horde of Indian companies have set up base in the GCC to benefit from the booming economy, the ease of doing business, the tax-free or low-tax environment and of course availability of a very large and well-skilled expatriate population, including the Indian population in the region.

Gems & Jewellery is one of the promising sectors for investment

According to reports, in 2013, total foreign direct investment (FDI) to GCC from India stood at over $2 billion. The sectors that have traditionally attracted most Indian investments include manufacturing, real estate and construction, financial services, ICT and agriculture & allied activities. The cumulative FDI outflows from India to the GCC region during 2008– 13 stood at $8.4 billion, registering a Compound Annual Growth Rate of 3.8%. Meanwhile, cumulative FDI outflows from GCC to India during 2008–13 stood at $2.2 billion, registering a CAGR of 2.8%.

Analysts say that back home, the GCC is likely to continue investing heavily in infrastructure and diversifying its economy away from oil, thus creating investment opportunities in several sectors, including Information Technology (IT); software technology; telecommunication; training and education; pharmaceuticals and healthcare; oil and gas; petrochemicals; tourism and hospitality; electricity; housing and infrastructure.

Also, Indian corporates could consider the GCC region as a re-export hub for their refining operations, as it offers cheaper feed owing to its abundant natural resources, an excellent infrastructure and its locational advantage. GCC can act as a gateway for access to the regional markets in Africa, Iraq, Iran and the CIS countries, among others. In addition, GCC is increasingly looking towards India for technological know-how, managerial expertise and foreign collaboration in sectors like commercial services (financial and ITES), manufacturing, food processing, training and education.

Although India’s investments in GCC have been largely driven by non-resident Indians in the region, businesses established in India are also increasingly setting up footprint in the region. Small and Medium Enterprises (SMEs) are one of the fastest growing business segments in the GCC countries and India’s relatively sizable SME sector could account for substantial investment flows into the GCC region.

According to Saudi Arabian General Investment Authority (SAGIA), 486 licenses have been issued to Indian companies as of March 2013, facilitating potential investments of more than US$ 1.6 billion. They span across sectors like management & consultancy services, construction, telecom, pharmaceuticals and information technology. Several Indian firms have also collaborated with Saudi companies in areas of designing, consultancy, financial services and software development.

A report by Alpen Capital says that the new Foreign Investment Laws implemented by Saudi Arabia in 2000 helped boost Indo-Saudi bilateral investments with a number of Indian corporates establishing JVs or wholly owned subsidiaries to grab growth opportunities in the Kingdom’s economy. Notable recent investments include Tata Motors’ USD 1.2 billion investment to set up Jaguar Land Rover assembly plant with annual production capacity of 50,000 units by 2017. Some of the other Indian investments in Saudi Arabia over the past five years include Larsen & Toubro, TCR Engineering Services and Punj Lloyd Ltd.

Alpen goes on to say that an estimated 26,500 Indian firms operate in the UAE , excluding the ones operating in the Free Trade Zones. India recently emerged as one of the top investors in the UAE . The leading Indian corporates and banks operating in the UAE include Essar Group, L&T, HCL Info systems, Hinduja Group, Indian Oil Corporation and Reliance Industries. Many Indian firms have set up manufacturing units either as JVs or are operating in the Special Economic Zones in the areas of engineering products, cement, building materials, textiles, consumer electronics, while some have invested in the country’s growing tourism, hospitality, catering, healthcare, retail and education sectors.

Many promising sectors

IT sector is another rich area for Indian investment as the GCC countries have excellent ICT infrastructure thanks to the direct government investments as well as private sector participation. It continues to be one of the fastest growing sectors, with a CAGR of 6–10% through 2015. Emerging trends in the industry includes opportunities in cloud computing, big data, security and enhanced mobility applications. India-based ICT firms or subsidiaries of multinational firms are already playing an important role in the development of the sector in the region.

Food is another interesting option for Indian firms. Increasing food consumption in GCC is driven by the growing population, rising income levels and changing lifestyle. The sector is estimated to grow at 3.1% CAGR over 2012–17 to reach 49.1 million tons. Imports account for nearly 70 per cent of the total consumption. Proximity to the GCC countries makes India an ideal sourcing and development partner for agro-based value chain in the GCC region.

Education and skill development is another booming sector as the region faces high level of unemployment among the local populace due to disconnect between existing skill sets and employer requirements. The region has to largely depend on the expatriate labour force. GCC countries have realised this gap and are investing heavily to develop human capital. GCC countries have effected reforms and established various governing bodies to improve overall education system. KSA, in particular, is spending 5.6% of GDP on education compared to world average of 4.4%. The total number of students in the GCC region is expected to grow to 11.6 million in 2016 from around 10.2 million in 2011 and a higher demand for education would also propel growth in the number of schools in the region. Another attraction for Indian education companies is the presence of a sizable Indian population in the region. Thus Indian education brands, such as Kidzee, EuroKids, Kangaroo Kids, Shemrock, Delhi Public School and Shemford schools, have already forayed into the region to cater to the local Indian expatriate population as well as the local populace. Indian universities, such as BITS Pilani, Manipal University, S.P. Jain, Amity University and Mahatma Gandhi University, have also established their footprint for higher education in GCC.

Financial services industry is another goldmine of opportunity for India. The country has a welldeveloped, as well as sound banking and financial services sector and now Indian financial services companies are actively looking at expansion opportunities here. For instance, Reliance Capital is investing in the GCC region to build a USD 2.0 billion business over the next five years. The insurance industry in GCC is estimated to expand at a CAGR of 18.1% to US$ 37.5 billion over 2012– 17, with life and non-life segments accounting for USD 2.4 billion and USD 35.1 billion, respectively.

GCC can explore business opportunities in the sectors like oil and handicrafts

Engineering contracts is another big booming sector for Indian firms. The GCC is forecasted to award contracts worth over USD 450 billion in various infrastructure projects and this augurs well for several Indian firms.

A major boost to the bilateral trade can be provided if both the sides manage to conclude the long-pending India-GCC free trade agreement. Once this deal is done, it would put the ties in a completely different orbit. The future is bright and the foundation of bilateral relations is strong. India-GCC ties are set to blossom even more in the next decade.