India-UAE FTA talks: Duty Relief likely for Job-intensive Sectors

India is in talks with its third-largest export destination, the UAE, for duty-free market access in products ranging from gems & jewellery and textiles & garments to certain engineering goods like steel under a proposed free trade agreement (FTA), sources told FE. It would be the first FTA to be signed by India in just over a decade.

To prevent any misuse of the FTA benefits and curb potential illegal inflows of Chinese goods through a key transit hub like Dubai, New Delhi will likely insist on strict rules of origin. It may either stipulate a 35% value addition at the UAE for all products to be eligible for duty concession under the FTA or impose similar conditions on select products where it sees the maximum scope for abuse, said one of the sources.

Both the sides started formal negotiations for a comprehensive economic partnership agreement (CEPA), as the FTA is formally called, in New Delhi from September 23. They aim to wrap up talks by December and sign a deal by March 2022.

About 87% of the products that the UAE imports are currently taxed at 5%, while 11% attract zero duty; the rest see higher duty incidence or are in the prohibited or special lists of goods, said another source. While it slaps a 5% duty on textiles & garments and jewellery, certain steel products are taxed at 10%. These three segments alone made up for 34% of India’s $16.7-billion exports to the UAE last fiscal and 43% in the pre-pandemic year of FY20.

The UAE is not keen on scrapping duties on all engineering goods but it may allow tax-free imports of certain steel products.

Abu Dhabi’s applied tariff (simple average for most-favoured nations) was 4.6% in 2020, much lower than New Delhi’s 15%. The goods that are in the high-tax brackets in the UAE include alcohol (50%) and tobacco (100%). Its trade-weighted average tariff (total customs revenue as percentage of overall import value) was 3.4% in 2019, against India’s 7%. So, New Delhi’s tariff concession will be more substantial than Abu Dhabi’s.

The FTA is expected to raise bilateral merchandise trade to $100 billion in five years following the signing of the pact from about $43 billion in FY21. It also aims to more than double bilateral services trade to $15 billion during this period.

The negotiations with the UAE are a part of India’s broader strategy to forge “fair and balanced” trade agreements with key economies and revamp existing pacts to boost trade. The move gained traction after India pulled out of the China-dominated RCEP talks in November 2019. Balanced FTAs will also enable the country to achieve sustained growth rates in exports in the coming years. Already, India has set an ambitious merchandise export target of $400 billion for FY22, against $291 billion in FY21.

The UAE was India’s second-biggest goods export market until FY20, behind only the US, before China pipped it in FY21 when the pandemic caused severe trade disruptions.

The UAE is the eighth-largest investor in India, having invested $11 billion between April 2000 and March 2021, while investment by Indian firms in the UAE is estimated to be as high as $85 billion during this period.

India’s major exports to the UAE include petroleum products, precious metals, stones, gems and jewellery, textiles and garments, food items, engineering goods and chemicals. Its main imports from the UAE include petroleum and petroleum products, precious metals, stones, gems and jewellery, minerals, chemicals and wood and wood products.