India-UAE CEPA | Large-scale rise in labour-intensive exports expected, commerce dept estimates show

The UAE flag. India imported about 70 tonnes of gold from the UAE in 2020-21.

India is set to reap major export growth across sectors as a result of the India-United Arab Emirates (UAE) Comprehensive Economic Partnership Agreement (CEPA), internal assessments of the deal by the commerce department show.

The first free trade agreement signed by the Narendra Modi government since coming to power in 2014, the CEPA aims to raise India’s bilateral trade to $100 billion in the next five years, up from $60 billion currently. This is primarily set to be achieved through the wide scope of the deal.

Officials say the deal is likely to benefit about $26 billion worth of Indian shipments that are currently subjected to 5 percent import duty by the UAE. While the commerce department’s calculations suggest the benefits will be broad-based, the deal is set to unlock the highest potential for labour-intensive sectors.

As part of CEPA, the UAE has offered overall duty elimination on over 97 percent of its tariff lines. This corresponds to 99 percent of India’s current exports to the UAE in value terms. From Day 1 of the agreement coming into force, 90 percent of India’s current exports to the UAE will have immediate market access at zero duty.

Moneycontrol takes a look at some of these sectors and their projected growth estimates under the new CEPA regime.

Jewellery and textiles

The gems and jewellery sector is set to be unarguably the largest beneficiary of the CEPA. Export of plain gold jewellery and gold-studded jewellery are expected to see an immediate impact, and shipments are expected to rise to a cumulative $10 billion per year by the next financial year of FY23.

Overall jewellery exports to the UAE stood at just $2 billion in the April-December period of FY22.  But before the pandemic, this figure had hovered around $8 billion per year in FY19 and FY20. Officials remain confident that going forward, the export of jewellery to UAE and the broader region will see sustained growth.

Meanwhile, tariff concessions offered to the UAE by India will see the cost of importing gold come down. India has agreed to concessional import duties of 2 percent on gold imports of up to 200 tonnes per year.

Currently, the average import duty charged by India for the rest of the world is 3 percent. As a result of the 1 percentage point drop in tariff, the input cost of jewellery makers is expected to come down. India imported about 70 tonnes of gold from the UAE in 2020-21.

Meanwhile, the commerce department projects an additional $2 billion worth of textiles exports over the next five years. Among subsectors, exports of man-made fibre textiles are expected to get a boost owing to their new duty-free status and are expected to rise to $650 million per year over the next five years from just $20 million a year in 2020-21.

Exports of cotton textiles are also expected to make an impact. Till November 2021, exports stood at $223 million, a growth of 28 percent over the same period in 2019. With zero tariffs, India can also cater to the UAE’s hospitality segment through the institutional sales of home textiles such as bed and bath linen as well as contract textiles such as beach towels, and salon and spa linen. As a result, exports in the category are expected to more than double in the coming years to $500 million.

Manufactured products

While the engineering goods sector has historically focused on the major markets of the United States and the European Union, the CEPA is aimed at boosting engineering exports to the Gulf and West Asia.

During April-December 2021-22, engineering exports to UAE recorded an impressive 77 percent rise to $4.2 billion, up from $2.4 billion in the same period in the previous fiscal. Going by current trends, exports are expected to close the current financial year at a sizable $5 billion.

The Commerce Department forecasts the growth of engineering exports to UAE at 10 percent in the first two years and 15 percent in the next three years. Exports of engineering goods are projected at $7 billion, $8 billion and $9.2 billion for FY25, FY26 and FY27 respectively.

Another major export category to the UAE, pharma, has seen a compound annual growth rate (CAGR) of 24 percent since FY17. This was faster than the CAGR of pharma sales in the UAE’s local market. As a result of CEPA, the CAGR is expected to remain firm at 26-28 percent in the next five years, crossing the $1-billion mark by FY27.

With the UAE’s local formulation industry developing rapidly, India may have a chance of increasing active pharmaceutical ingredient exports much faster now. The CEPA also includes an annexe on pharmaceuticals which facilitates access of Indian pharmaceuticals products to the UAE through automatic registration and marketing authorisation of Indian generic medicines in 90 days.

The government also hopes to tap into the UAE’s plans to become a regional distribution hub for pharmaceuticals by 2030. The country is gearing up to become a global logistical centre with technically advanced transport and storage facilities that can distribute pharmaceuticals on a global scale.

With an eye on the Gulf region and the greater West Asian market, India also hopes to nudge automobile exports towards the UAE, with a projected $160-million increase in exports over the next five years. With the CEPA benefits, the average per-unit price for India-manufactured passenger vehicles is poised to reduce from $12,829 to $12,218.

Official’s stress that the large immigrant population in the UAE continue to prefer affordable vehicles, and the market is currently wide open for certain lower-priced ranges. India already has a strong market presence in commercial vehicles and the two-wheeler segments, where the gains are set to be higher.

Commodities

Plastics remain one of the largest industrial commodity exports to the UAE. During FY21, India exported plastics worth $418 million to the UAE. The newly gained preferential access is expected to induce additional exports of $872 million in the short term, or a total plastics export bouquet of $1.3 billion, the Commerce Department believes.

Another $402 million worth of exports in the long term is set to be achieved due to the lower cost of imported inputs. India has offered a lower tariff to the UAE for plastic inputs such as polyethylene and polypropylene.

Higher exports are also expected in a host of other labour-intensive sectors.

For the leather and footwear sectors, additional exports are projected at $130 million over the next five years. Additional exports of $850 million over the next five years is expected from the agri sector as the CEPA includes wholly obtained criteria on a number of agricultural products.

The government also expects furniture, wood products and sports goods to be shipped in higher volumes since the duties imposed by the UAE on them will be reduced to zero as part of CEPA.