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UAE and India settling on non-oil trade in Indian Currency

  • Published
    20th Jan, 2023
Context

UAE and India are trying to negotiate the non-oil trade in Rupees as India is seeking for several trade agreements dealing in dollars remaining a trading contest among countries.

Need of the initiative:

  • The large majority of Gulf trade is conducted in U.S. dollars but countries such as India and China are increasingly seeking to pay in local currencies for various reasons, including lowering transaction costs.
  • The UAE signed a wide-ranging free trade agreement last year with India, which, along with China, is among the biggest trade partners for Gulf Arab oil and gas producers, most of whose currencies are pegged to the U.S. dollar.

Benefits of trading oil in Indian currency:

  • More frequent cross-border transactions in the rupee will help in the process of internationalizing the rupee.
  • It would reduce dependency on the dollar for cross-border transactions thus lowering the requirement of maintaining a huge Forex Reserve.
  • Reducing dependence on foreign currency makes India less vulnerable to external shocks.
  • It lowers the transaction cost which occurs during cross-border transactions in Dollars

The Comprehensive Economic Partnership Agreement (CEPA) between India and UAE:

  • It is a Free Trade Agreement that took effect on 1st June 2022.
  • It has a separate chapter on small and medium enterprises that recognizes the fundamental role of SMEs in maintaining dynamism and enhancing the competitiveness of the respective economies of both countries.
  • From Day 1 of the agreement coming into force, 90 per cent of India’s current exports to the UAE will have immediate market access at zero duty.
  • Duties on an additional 9 per cent of India’s exports are set to reduce to zero within the next 5 to 10 years, according to CEPA provisions.
  • The CEPA is likely to benefit about $26 billion worth of Indian shipments that are currently subjected to a 5 per cent import duty by the UAE.
  • The major beneficiaries of this would be gems and jewellery, apparel, engineering products, and pharmaceutical exports.
  • A separate Annex on Pharmaceuticals has been incorporated to facilitate early access of Indian pharmaceuticals to the UAE market.

Significance of the agreement:

  • UAE is the second largest source of gold for India.
  • Lowering of tariff on gold coming from UAE will boost the gems and jewellery sector in India and also disincentives smuggling of the yellow metal into India.
  • The CEPA with the UAE incorporates a permanent safeguard mechanism that can be resorted to by either nation, in case of a sudden surge in imports.
  • Both countries have also prepared separate exclusion lists, detailing the products that they want to keep out of the ambit of the FTA, owing to sensitivities.
  • To protect domestic industry, India has decided to keep a range of agri-products outside the deal.
  • This includes dairy, tea, coffee, rubber, spices, sugar and tobacco products.
  • Manufactured items such as pharmaceuticals, certain chemicals including azo dyes, aluminium and copper scrap, and certain categories of steel, helicopters and aeroplanes have also been kept out.
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