In today’s Finshots, we talk about an economic partnership between India and the UAE and how it's helping improve bilateral trade.

The Story

There’s been an interesting development. India’s jewellery exports to the UAE have witnessed a significant bump. And many are crediting this new development to the Comprehensive Economic Partnership Agreement (CEPA).

Don’t worry. The name’s complicated but the premise is fairly straightforward. The main objective is to improve trade engagements between India, the UAE and the wider Gulf Cooperation Council (GCC) region.

And while the agreement was only implemented in May 2022, the benefits have become obvious within just a few months. We’ve witnessed a 10% jump in gems and jewellery exports to the UAE in the first quarter of FY23 when compared to the same period last year. After CEPA implementation, exports witnessed a 17% leap (in May and June alone when compared to the same period last year).

Now you might look at this and ask — “What’s so special about CEPA? And does it deserve the hype?’’

Well, it’s complicated. But before we get there, let’s look at what CEPA actually means.

A CEPA, as we already noted is an economic partnership between two countries. In many ways, it’s a lot like a Free Trade Agreement (FTA). Two countries sit down. They decide to cut down trade barriers and tariffs. They work on improving trade engagements. And they put in place rules to enable importers and exporters in both countries to work with each other. CEPA does these things too. The only difference is that an FTA traditionally focuses on trade in goods. But a CEPA also extends to engagements in the services sectors, foreign investments, disputes and even regulatory matters. And considering our close engagement with the UAE, we signed the agreement back in February to build on our relationship with the country.

Unfortunately, there hasn’t been a lot of chatter since then.

But last week, we got a hint of the hidden potential here when Malabar Gold and Diamonds said they’d imported 25 kg of gold under CEPA. They said this was possible because of the tax concessions.

What tax concessions?

When importers in India ship gold coins and bars from the UAE, they’d have to pay the applicable duties. But under CEPA, they get a 1% rebate — a concession. Similarly, importers in the UAE were earlier expected to pay a 5% duty on gold jewellery. Now, they have to pay nothing.

And while this may look insignificant at first sight, there’s a lot happening here. India is one of the largest importers of gold. Last (financial) year we spent a whopping $46 billion on importing 842 tonnes of gold. And the UAE is the second-largest gold trading partner. So if we can import some gold at a slightly discounted price, it will reduce our import bill considerably. Meanwhile, if we can export gold without having to pay the 5% duty, Indian jewellery products become more appealing to consumers in the UAE.

This could also help us redistribute our products to UAE’s neighbours also. We could get better access to markets in North Africa, West and Central Asia and even Europe.

Perhaps now it’s obvious why jewellery exports to the UAE have been climbing. At this pace, we could easily achieve the gems and jewellery export target of $45.7 billion for the year.

But gold and gems aren’t the only things we’re targeting here. The concessions will also apply to textiles, leather, footwear, sports goods, plastics, furniture, agricultural, wood products, engineering products, medical devices and automobiles.

And there’s the services sector too. Take, for instance, digital trade. This agreement will allow electronic transactions to go through without a hitch unless there’s something unlawful happening. All in all, trade in services could breach the $15 billion mark in five years.

But what if other countries jump on this bandwagon and take us for a ride? What if they ship cheap goods to the UAE and then find ways of pushing their goods to India? Won’t this hurt manufacturers domestically?

Well, yes it would. But these concessions only apply to goods and services that originate in the UAE or at least in cases where the UAE has a meaningful contribution (value addition of 40-45%).  So there’s some cushion to protect India against indiscriminate dumping.

The only question is , can we expect a significant boost in other sectors just like we’re currently witnessing with gold and gems? Well, we will have to wait and see.

Until then…

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