How The UAE-India Currency Deal Will Help Bilateral Trade & Investment

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The recent agreement between the UAE and India to allow businesses in the two countries to invoice and pay for goods and services in the Indian rupee (INR) and the UAE dirham (AED) – will have a significant impact on the trade and manufacturing sectors in both countries.

A second MoU to interlink the two countries’ payment systems (UPI and IPP) was signed during Indian Prime Minister Narendra Modi’s recent visit to Abu Dhabi.

These agreements will play a significant role in achieving the targets set by the India-UAE Comprehensive Economic Partnership Agreement (CEPA), which aims to boost bilateral trade to US$100 billion in the next five years, strengthening supply chains.

Faizal Kottikollon, Chairman the UAE- India Business Council has called agreement ‘groundbreaking’ for several reasons, stating that “This will have ripple effects in the larger subcontinent and Middle East region. The UPI and IPP integration and interlinking of both countries’ card switches will safeguard traders on the micro level by hedging the exchange rate risk and reducing transaction cost and settlement time.”

How will this agreement help UAE-India bilateral trade?

The deal’s impact will help overcome a major bottleneck in trade transactions, and is a strategic game changer. It will lower the pressure on local currencies and encourage greater exports between the two countries to cross the US$100 billion trade target faster than expected.

Kami Viswanathan, FedEx Express Senior Vice-President of the Middle East, Indian Subcontinent and Africa Operations, said that, “The deal eliminates the need for multiple currency conversions and associated transaction costs, resulting in significant cost savings and enhancing the competitiveness of products.” In addition, she explained that integrating payment systems streamlines cross-border transactions, expedites the payment process, and grants businesses quicker access to funds.

This increased efficiency facilitates smoother trade operations and strengthens the market access for Indian exporters, as it creates a framework that opens opportunities for India-based businesses to expand their exports through the UAE.

During the UAE and India Comprehensive Economic Partnership Agreement (CEPA) implementation period, there has been an 8.5% growth in India’s exports to the UAE – increasing from US$26.2 billion to US$28.5 billion. However, within this, the gems and jewellery sector especially has grown exponentially since the CEPA signing.

How will the agreement help tourism?

The linking of the UPI and IPP systems will boost the local economies of both nations and provide a boost to both countries’ tourism aspirations.

Tourists to both countries will be able to leverage the benefits of the proposed partnership to use their respective domestic payment apps and local cards to pay for services, tickets, travel expenses, food, and local merchant purchases, as well as withdraw money without incurring higher transaction fees that are presently levied by external payment networks.

Khalil Alami, Founder and CEO of Telr, a payment gateway provider, said, “Many providers stand ready to support businesses and travellers in both countries, taking advantage of this development to streamline their payment processes for individuals and entities alike.”

We look forward to this conjunction considering the rapid increase in Indian consumers in the UAE, and I have no doubt that this will open many doors for us.”

A boost to manufacturing

A boost in manufacturing capabilities is also on the cards. Dilip Sinha, a former Secretary General of the Indian Business and Professional Council said, “There is a huge incentive for international companies to set up their manufacturing units in India and export to the UAE and other Middle Eastern nations (via the UAE) once the deal is ratified.”

Many companies are already manufacturing in India, but with ongoing Make in India initiative, the deal could help several international agri-businesses, pharma, jewellery, textiles, machinery spare parts, and FMCG firms set up production units in India.

On the energy front, there is already a big participation from companies like Larsen and Turbo and Tata Steel. “Electrical products manufactured in India are finding a huge market internationally. With the reduction in transaction costs, these sectors have a higher incentive to create a trade channel for their goods and services,” Sinha added.

Will the currency agreement help create new jobs?

As bilateral trade increases sharply thanks to this new partnership, more investment will flow between the two countries as trade outposts and logistics and manufacturing hubs are built to cater to the increasing demand. This will significantly increase jobs and pave the way for more economic growth on both sides while helping unlock opportunities in new sectors. This will also encourage greater FDI and increase the scope for collaborations through easier trade financing.

Will UAE & Indian SMEs gain from the deal?

The deal would also attract a larger number of Indian companies who are not doing business in the UAE. “The deal provides a greater scope for small and medium business enterprises. The huge transactional costs upset the budgets of most companies, especially due to exchange rate volatilities. Once that hurdle is removed, more Indian businesses would consider setting up a second base in the UAE.

More on this subject from the Indian perspective can be read here: India, UAE Agreements on Currency Settlement, Payment Systems, and Key Sector Collaboration

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