International Journal of Economics, Commerce and Research (IJECR) ISSN 2250-0006 Vol.2, Issue 4 Dec 2012 1-8 © TJPRC Pvt. Ltd.,
EVOLUTION OF INDO-GCC TRADE RELATIONS: THE LAST TWO DECADES 1 1
KUMAR RISHABH & 2RAJIV RANJAN
Research Officer, International Relations Division of Department of Economic and Policy Research (DEPR), Reserve Bank of India (RBI), Mumbai 2
Director in DEPR and RBI, Deputation to Central Bank of Oman as Economic Policy Expert, Muscat
ABSTRACT Indo-GCC trade has grown significantly in the last two decades following India’s opening up of its economy with major economic reforms in 1991 and after. Trade in goods has become an important aspect of Indo-GCC economic relations, which were traditionally founded on migration of workers from India to the GCC countries. We review in detail the commodity and geographical structure of Indo-GCC trade and its changing dynamics over the last two decades. While the two-way Indo-GCC trade is valued at around US$ 90 billion compared to US$ 5 billion in the early nineties, UAE and Saudi Arabia account for the major portion of it and significant potential exists for other GCC economies to expand their trade with India.
KEYWORDS: Bilateral Trade, India-GCC Trade, Commodity Structure Of India’s Trade, Geographical Distribution of India’s Trade, Hirschman-Herfindahl Index
INTRODUCTION The relative importance of GCC countries (viz. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE)) and India for each other has increased significantly as their economic ties have strengthened following India’s adoption of the globalization path since 1990s and GCC countries recently invigorating their “look east” policy. Ever since the adoption of the globalization as a policy agenda in the early 1990s, India has gradually opened its economy to trade and financial flows. However, the economic relations between India and GCC have got boost from trade flows rather than financial flows. For instance, while GCC accounted for around 18% of India’s trade in 2010, its share in India’s cumulative FDI inflows was just 1.8% for the period April 2000-December 2010*. India - GCC trade relationship is expected to strengthen further as they mutually become economically more important for each other. This is evident from some broad developments in the recent past. First, the traditional trading partners of the GCC i.e. advanced economies, though still maintaining a strong trade relationship with the GCC, have seen their relative importance decline since 1990s with a noticeable shift towards emerging markets. It is expected that among emerging economies, Asia will become the most important region for the GCC with India also assuming a significant role. (The Economist, 2011) Second, According to BP’s Statistical Review of World Energy 2011, India is the 4th biggest oil consumer with 3.3 million barrels daily consumption of oil; by 2030 this figure is likely to rise to 5.2 million barrels per day (Thirlwell and Bubalo, 2006). With India relying heavily on GCC for meeting its oil needs, India is expected to remain a big market for GCC’s oil and related products.
Authors’ calculations based on data from Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India
Kumar Rishabh & Rajiv Ranjan
In this short piece we explore the trade relations between India and GCC countries and how they have evolved in the last two decades. First we try to place GCC as a bloc in India’s overall trade, identifying their importance as trade partners for each other. In the Second section we analyse the commodity structure of India’s trade with GCC and in the third section briefly explore the trade relations with individual GCC countries. We use commodity level bilateral data from United Nations Commodity Trade Statistics Database known as UN Comtrade. We use two digit HS-1992 commodity classifications in order to get a sufficiently long data series for analyzing the trends post major policy changes in India in 1991-92. For consistency, all our analyses are between the years 1992 and 2010.
TREND IN INDIA’S TRADE WITH GCC India and GCC have traditionally shared a strong economic relationship. India- GCC relationship deepened overtime because of huge scale migration of workers from India to GCC countries. According to a World Bank estimate in 2010, out of the total 11.3 million migrants from India almost 43% (4.9 million) are settled in GCC countries. Another aspect of this high migration to GCC is that India receives a sizeable proportion of its remittances from GCC. According to the World Bank’s bilateral remittance estimates, of the US$ 55 billion remittance India received in 2010, US$ 24.5 billion came from GCC. (World Bank, 2011) Trade relations between India and GCC have also strengthened over time as both have diversified their trade reach geographically. Looking at the regional distribution of GCC total trade (exports plus imports) since 1992 we find that GCC as a group has been diversifying away from advanced economies to emerging and developing economies, as mentioned above. (Figure I.I). Share of advanced economies in GCC trade decreased from 73% in 1992 to around 50% in 2010. A large shift has also occurred in the share of developing Asian countries. India has also gained a higher proportion in GCC trade since 1992, now accounting for above 10% of GCC total trade as against 3% in 1992.
Figure I: I Regional Distribution of GCC Trade As far as the share of GCC in India’s trade is concerned that also has improved substantially since 1992. GCC’s share in India’s trade hovered around 12-15% in 1990s but reached around 20% in 2010. To put this figure in perspective, the six GCC countries collectively account for around 74% of India’s trade with 19 country Middle East and North Africa (MENA) region. Share of MENA region in India’s trade widened mainly after 2005 largely driven by increase in GCC share in India’s trade.
Evolution of Indo-GCC Trade Relations: The Last Two Decades
India’s trade with GCC, much in line with India’s global trends, in the 1990s remained stagnant and indeed started growing after 2002- 2003. India’s exports to GCC, which grew at a Compound Annual Growth Rate (CAGR) of around 12% between 1992-03, increased at a CAGR of around 29% between 2003 and 2010 while imports grew at a CAGR of around 53% in the same period. Higher growth of imports than exports in 2000s turned India’s trade surplus into deficit vis-à-vis GCC since 2006. (Figure I.II).
Figure I: II India's Trade with GCC The relatively better performance of Indo-GCC trade in the second half of 2000s can be attributed partly to the higher commodity- especially oil- prices in that period and partly to the increased bilateral efforts, to enhance trade relationship, that were undertaken during this period. India and the Member States of the GCC signed the Framework Agreement of Economic Cooperation on 25 August 2004 in New Delhi and consequent first round of negotiations happened on March 21 -22 2006. The Framework provided a clear set of agendas for the bilateral trade and economic relationship over the following years. It covers a wide range of activities aimed at improving commercial and policy linkages, and delivering improvements to the overall business environment to both countries’ mutual benefit. As a part of the Framework, India and GCC countries agreed to undertake possible negotiation of a bilateral free trade agreement (FTA). Despite the political turmoil in the Arab world, the talks for a free trade agreement (FTA) between India and the Gulf Cooperation Council (GCC) seem to be still on track. India’s trade and economic relations with the GCC countries is kept under regular review through bilateral Joint Commissions. India has such institutional arrangements with all GCC countries. (Pradhan 2006)
COMMODITY STRUCTURE OF INDIA’S TRADE WITH GCC The next question that naturally arises is which are the commodities that form the strong base of India-GCC trade? We compare the average shares of commodities in the periods 1992-2000 and 2000-2010 to see if there are long term changes in the commodity structure of India’s exports to and imports from GCC. Table II.I reports the average share of some of the commodities in India’s exports. There is a marked shift in the commodity structure of India’s exports to GCC. For example, Cereals, which contributed around 13% to India’s exports to GCC in 1990s, contributed only 5.7% in 2000s. India’s exports to GCC have become relatively more concentrated in 2000s
Kumar Rishabh & Rajiv Ranjan
as compared to 1990s albeit the concentration is resulting from the new commodity groups in the top ten like Mineral fuels, oils, distillation products† and Electrical and electronic equipments etc. Top ten commodities in 1990s had a cumulative share of around 56% while in 2000s this share increased to around 72.5%. Table 1: Top Commodities in India's Exports to GCC: % Share
Commodity 1 2 3 4 5 6 7 8 9 10 11 12 13
26.61 17.00 5.67
Average Share 1992-00 7.44 0.29 13.32
Share in 2010 38.74 17.86 4.46
4.01 3.89 3.37 3.17 2.48 2.15 0.90 1.02
3.13 3.43 0.51 2.47 2.06 4.50 4.17 3.43
3.46 5.28 2.17 2.67 1.74 1.10 0.37 0.75
2.94 3.42 0.28 1.79 1.71 6.21 4.80 3.85
Average Share 2000-10
Pearls, precious stones, metals, coins, etc Mineral fuels, oils, distillation products, etc Cereals Articles of apparel, accessories, not knit or crochet Nuclear reactors, boilers, machinery, etc Articles of iron or steel Copper and articles thereof Electrical, electronic equipment Iron and steel Manmade filaments Cotton Coffee, tea, mate and spices Fish, crustaceans, molluscs, aquatic invertebrates
Share in 1992 6.13 0.64 15.47
Source: Authors’ Calculations based on Data from UNComtrade As against what witnessed in exports, structure of Imports have not changed much in line with India’s global imports. (Table II.II). As expected, Mineral fuels, oils, distillation products, etc have the largest share in India’s imports though it has declined overtime, from 82% in 1992 to 61% in 2010. Imports from GCC remain highly concentrated with top two commodities viz. Mineral fuels, oils, distillation products, etc and Pearls, precious stones, metals, coins, etc themselves constituted around 87% in 2000s as against around 81% in 1990s. Table 2: Top Commodities in India's Imports from GCC: % Share
1 2 3 4 5 6 7 8 9 10 †
Mineral fuels, oils, distillation products, etc Pearls, precious stones, metals, coins, etc Organic chemicals Plastics and articles thereof Fertilizers Iron and steel Inorganic chemicals, precious metal compound, isotopes Aluminium and articles thereof Salt, sulphur, earth, stone, plaster, lime and cement Electrical, electronic equipment
Average Share 2000-10
Average Share 1992-00
Share in 2010
Share in 1992
19.27 2.55 1.47 1.24 1.14
3.67 2.98 1.90 2.62 1.13
28.55 2.53 1.78 0.73 0.75
0.25 1.74 1.29 2.22 0.91
Terms ‘Mineral fuels, oils, distillation products, etc’ and ‘Oil’ are used interchangeably in the article. Both refer to the commodity code HS 27 of the Harmonised System used here.
Evolution of Indo-GCC Trade Relations: The Last Two Decades
Source: Same as table II.I To analyse the degree of concentration (or diversification) of exports and imports baskets over time, we look at the Hirschman-Herfindahl Index (HHI), which is defined as the sum of squared shares of each commodity in total exports and imports respectively. A higher HHI indicates higher concentration or less diversification. HHI has been calculated using data disaggregated at the HS two digit levels. Figure II.I presents the HHI for India’s exports to world and to GCC and its imports from the world and GCC. As far as exports are concerned, India’s overall exports are quite diversified as compared to its exports to the GCC region. Not only that, exports to GCC are becoming more concentrated as evident from the increase in HHI values in 2000s compared to 1990s, while India’s exports to the world has not shown any increase in concentration. For India’s imports, as expected, HHIs are higher than corresponding exports HHIs for world and GCC both. Further, imports from GCC are more concentrated than total imports, naturally because of high share of the commodity group Mineral fuels, oils, distillation products, etc. HHI for India’s imports from the world also show a small upward trend in 2000s as compared to 1990s while for the imports from GCC show lower HHIs in 2000s as a whole but again the last five year data suggests that the decline is not significant. To control for the high concentration of Oil products we calculate the HHI values for India’s non-oil exports and imports calculated by using trade data without the commodity category Mineral fuels, oils, distillation products, etc (HS 27). The HHIs thus calculated are presented in the Figure II.II. As it is clear HHIs for non oil imports are significantly lower for both imports from world and from GCC as compared to the aggregate HHIs calculated before. However, it is notable that HHIs increase for both in 2000s as compared to 1990s while the rise is more striking in case of GCC imports. One reason for this could be huge increase in the share of Pearls, precious stones, metals, coins, etc since 1990s. This commodity group, in 2010, laid its claim on around 29% of India’s imports from GCC as compared to only quarter of a percent in 1992. HHIs for non-oil exports do not differ significantly from aggregate exports.
Figure II.I: HHI for Commodity Basket Concentration
Figure II.II: HHI for Non Oil Commodity Basket Concentration
Source: Authors’ calculation based on data from UN-Comtrade The results presented in this section were mainly of the aggregative level analysis of India’s trade with GCC. In the next section we explore the country wise trade relations between India and GCC.
Kumar Rishabh & Rajiv Ranjan
COUNTRY WISE ANALYSIS OF INDIA GCC TRADE India’s trade with GCC is significantly biased towards two big countries UAE and Saudi Arabia. Table III.I shows the average share of six GCC countries in India’s exports to and imports from the region for the three periods 1992-1998, 1998-2004 and 2004-2010. UAE’s share in India’s exports has consistently increased over these periods and in the period 2004-2010 it accounted for three fourth of India’s exports to GCC, up from around two third in 1998-2004. As far as India’s imports are concerned, it is somewhat less concentrated geographically but UAE and Saudi Arabia together still account for around 72% ofIndia’s imports from the region. Table 3: I Country wise Average Share in India’s Trade with GCC (%) Bahrain
Oman Qatar Saudi Arabia Exports 2.6 6.2 4.4 1.5 24.5 1992-1998 1.8 4.9 3.7 1.5 19.3 1998-2004 1.3 3.6 3.2 1.9 14.9 2004-2010 Imports 3.7 21.9 0.5 2.8 38.6 1992-1998 5.1 16.1 0.8 4.6 31.6 1998-2004 1.7 15.4 3.2 7.4 34.5 2004-2010 Source: Authors’ Calculations based on Data from UNComtrade
UAE 60.8 68.8 75.2 32.6 41.8 37.9
Looking at the trade numbers country wise we find that broad trends in trade growth and commodity structure though remain same across the GCC member countries there are some interesting differences. We discuss in short India’s trade position vis-à-vis each of the GCC country. India’s exports to Bahrain which grew only at a very modest pace in 1990s (2.6% CAGR) picked up in 2000s (27% CAGR). India’s imports from Bahrain showed a consistent growth throughout the period under study. In 1990s it showed a CAGR of around 17.5% while in 2000s around 18.5%. Due to high growth in import values in the period after 2004, India’s deficit vis-à-vis Bahrain increased up to about US$ 1400 million in 2008, which otherwise had remained modest throughout the period 1992-2010. Inorganic chemicals, precious metal compound, are the top commodity of export from India to Bahrain, which significantly increased their average share from around 0.5% in 1990s to 12.7% in 2000s. Oil and related products remains the most important import item. As far as Kuwait is concerned, India’s trade relation with it center on its huge oil imports from the country. Oil and related products during the entire 1990s and 2000s accounted for more than 90% of India’s Imports from Kuwait. The value of India’s total trade with Kuwait increased from US$ 742 million in 1992 to US$ 8.4 billion in 2010 mainly on account of growth in imports. Imports grew from US$ 621 million in 1992 to US$ 6.8 billion in 2010 while exports grew to US$ 1.6 billion from US$ 121 million in 1992. India’s moderate trade surplus of early 2000s turned into deficit and further increasing it to a maximum of US$ 9.9 billion in 2008. Contrary to Bahrain and Kuwait, India had trade surplus for the whole of 1990s and up to 2008 vis-à-vis Oman. Since 2008 India had a trade deficit with Oman which peaked in 2009 at around US$ 1.49 billion. Indo-Oman trade grew from around US$ 100 million in 1992 to US$ 3.2 billion in 2010. This increase was mainly account of huge growth in imports from around US$ 16 million in 1992 to 2.3 billion in 2010. India’s exports to Oman increased from US$ 83 million in 1992 to US$ 901 million in 2010. For Qatar, exports increased to US$ 373 million while imports to US$ 4.8 billion in 2010 registering a CAGR for the 18 year period of 15% and 23% respectively.
Evolution of Indo-GCC Trade Relations: The Last Two Decades
The growth rates in 2000s are much higher, 20% for exports and 51% for imports. Increase in imports took place mainly on account of increase in oil imports. Qatar, in 1990s, had a share of merely 0.87% in India’s imports of the commodity category Mineral fuels, oils, distillation products, etc from GCC, the share in 2000s increased to about 9%. Similarly, the increase in share of Mineral fuels, oils, distillation products, etc in imports from Qatar is also remarkable, in 1990s the average share of this commodity group stood at just 30% but in 2000s it increased to around 81%. As far as India’s second largest trade partner in GCC, Saudi Arabia, is concerned, it is the biggest exporter of oil to India and alone accounts for around 45% of India’s oil imports from the region. The magnitude of Indo-Saudi Arabia trade, which is around US$ 19.5 billion now, significantly rose from US$ 1.8 billion in 1992 and US$ 2.5 billion in 2004. India has run trade deficit vis-à-vis Saudi Arabia in the entire period of analysis except for a brief period in early 2000s when it had moderate trade surplus. The deficit in 2008 widened to around US$ 13 billion before declining to around US$ 10.6 billion in 2010. India’s exports to Saudi Arabia in 2010 (around US$ 4.5 billion) reached ten times its value in 1992. Cereals is the largest commodity group of exports with around 19% share in exports in 2000s even though it is significantly down from around 40% in 1990s. As far as India’s imports from Saudi Arabia are concerned, there has not been much change in the structure. Although the value of imports increased from US$ 1.3 billion in 1992 to US$ 15 billion in 2010, most of the rise has been in the commodity group Mineral fuels, oils, distillation products, etc which saw its share in imports rise from 82% in 1990s to 88% in 2000s. UAE is India’s largest trade partner from the GCC region. It is also the only GCC country vis-à-vis which India has a trade surplus. India’s trade with UAE increased from US$ 1.9 billion in 1992 to above US$ 52 billion in 2010 registering a CAGR of around 20%. Growth in 2000s (38% CAGR), like other GCC countries, was higher than in 1990s (7.7% CAGR). India’s surplus grew at an accelerating pace starting in 2000 and up to 2006; it turned negative in 2008 but quickly recovered 2009 and 2010. At its peak in 2009, India’s trade surplus vis-à-vis UAE was US$ 5.6 billion. India’s exports to UAE mainly consists of Pearls, precious stones, metals, coins, etc and Mineral fuels, oils, distillation products, etc. These two commodity groups accounted for 58% of India’s exports to UAE in 2000s. The former has always remained an important commodity in India’s exports and had a share of around 11% in India’s exports in 1990s. The latter has picked up only recently as evident from the fact that the share of this commodity group in India’s exports in 1990s was less than half a percentage. India is not a major miner of precious metals and stones such as diamonds but it is the largest processor of diamonds in the world owing to its skilled labour and low cost of processing. Indeed, Dubai in UAE is India’s big re-export market for pearls and precious stones. The commodity accounted for above 50% of India’s imports from UAE which was up from around 11% in 1990s.
CONCLUSIONS Indo-GCC bilateral trade has witnessed impressive growth in the recent years. The two-way trade has reached around US$ 90 billion, the average growth of which, over the past few years, has been around 40% per annum. We discussed how GCC economies are increasingly integrating with the emerging economies especially with those in Asia. This has provided an added reason for India-GCC trade relations to strengthen. India has gradually widened its trade basket even though there is evidence of increasing concentration especially in imports. This indicates a potential in trade deepening that is yet to be realized. Pradhan (2006) identifies another source of potential increase in Indo-GCC trade that emerges from the relatively smaller trade partners from GCC like Oman, Qatar, Bahrain and Kuwait. As discussed above these four countries hold a share of only 14% in India’s exports and 28% in
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India’s imports from the region. Another source for enhancement of the bilateral economic relations between India and GCC, that may have a beneficial impact on trade as well, comes from investment. In recent years GCC countries have been attracting foreign investment and India has emerged as one of the investors in GCC. Also, India has played host to increasing investment from the GCC region since some time. Though investment from GCC is still a small part in India’s inflows the potential for its expansion are huge. Future course of the development of trade relations would depend upon how vigorously India pursues its policies of ‘outward orientation’ and ‘commodity basket diversification’ while GCC steers its ‘look east’ policies. In such a scenario it will be interesting to see if an FTA agreement is materialized and how it impacts the two-way trade flows between India and GCC.
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Thirlwell, Mark and Bubalo,Anthony. 2006. ‘India Looks West; the GCC Looks East.’ GCC India Research Bulletin, Issue no 2, June 2006.
World Bank (2011), ‘Migration and Remittances Factbook 2011’