Context:

Recently, the Indian Prime Minister was on his fifth visit to the UAE in the last eight years and the Central Bank of India & UAE agreed to establish a framework for enabling the use of local currencies for cross-border transactions. 

Image Credits: Encyclopedia Britannica

About Local Currencies for Cross-Border Transactions: 

• Promotion of Local Currencies: A pact was signed to promote the use of rupee and UAE dirham (AED) for cross-border transactions. 
  • LCSS: Focus was on the establishment of the Local Currency Settlement System (LCSS). 
  • Example: Enabling exporters and importers to invoice and pay in their domestic currencies, reducing transaction costs and settlement time. 
• Significance: 
  • Use of Domestic Currencies: It would enable exporters and importers to invoice and pay in their respective domestic currencies.
  • Exchange Market: It would enable the development of an INR-AED foreign exchange market.
  • Promote Investment: It would also promote investments and remittances between the two countries. 
  • Transaction Cost & Settlement Time: It would optimize transaction costs and settlement time for transactions, including for remittances from Indians residing in the UAE.
  • Boost Trade: It would improve the ease of doing business and boost trade.
  • Internationalization of Rupee: It could also potentially serve as a precursor for other bilateral currency and further could act as an important first step for the internationalization of the rupee. 

Other Key Highlights of the Visit:

• Energy Sector Collaboration: Cooperation in Green Hydrogen, solar energy, and grid connectivity. 
  • Example: Joint development of renewable energy projects in both countries. 
• Strategic Petroleum Reserves: Increased investment in India’s Strategic Petroleum Reserve Programme. 
  • Example: Recently, India allowed Abu Dhabi National Oil Co (ADNOC) to export oil from its Mangalore strategic petroleum reserve (SPR).
• Climate Change Cooperation: Joint work on climate change during India’s G20 presidency and UAE’s COP28 presidency. 
  • Commitment to make COP28 a success.
  • The COP28 summit will be the first formal assessment of countries’ progress towards the Paris Agreement’s target to limit climate change to 1.5 Celsius (34.7 Fahrenheit) of warming. 
  • Example: Collaborating on renewable energy initiatives to reduce carbon emissions.
• Indian Diaspora and Bilateral Trade: Facilitating ease of business for Indian companies in the UAE and vice versa. 
  • India-UAE CEPA: In May 2022, India became the first country with which UAE signed the Comprehensive Economic Partnership Agreement (India-UAE CEPA), which is a kind of free trade pact that covers negotiation on the trade in services and investment, and other areas of economic partnership.
• Food Projects: To promote the reliability and resilience of food supply chains and expand food and agriculture trade, including through food corridors projects in India. 

Bilateral Relations:

• Diplomatic Relations: 
  • Established in 1972. 
  • Strengthened economic, defense, security, and law enforcement cooperation. 
  • Example: India and the UAE partnering on defense technology and joint military exercises. 
• Economic Relations: 
  • India-UAE trade rose to USD 85 billion in 2022. 
  • UAE is India’s third-largest trading partner for 2022-23.
  • UAE is India’s second-largest export destination. 
  • Annual remittances by the Indian community in the UAE over US $17.06 billion. 
  • Example: India’s export of pharmaceuticals and IT services to the UAE. 
  • Bilateral trade is currently at USD 85 billion, aiming to reach USD 100 billion.
• Energy Security and Technology Partnerships:
  • UAE is a reliable energy exporter for India’s growing industrial and manufacturing capacity. 
  • Agreements on oil supply and pricing. 
  • Digital innovation and technology partnerships. 
  • Example: Collaboration between ISRO and UAESA for space missions. 
• Common Stance on International Issues:
  • Similar opinions on strategic issues like the dominance of the US dollar in international trade and counterterrorism efforts. 
  • Advocacy for a rules-based international order. 
  • Example: Participation in minilateral groupings like India-UAE-France maritime trilateral. 

Challenges in the Relations: 

• Implementations in Investment: As far as investments are concerned, slow implementation from the Indian side is a major obstacle.
• Trade: Bilateral trade is not appropriate, which potential both the countries have.
• Workers: The workers from other nationalities including Filipinos and Bangladeshis are replacing Indian workers in UAE.
• Balancing geopolitics: India with Iran and UAE with China, resulting in impacts of bilateral relations.

Way Forward:

• Timely Investment: India needs to ensure the execution of the investment projects in specified time with high-quality.
• Medical Tourism: Both India & UAE cooperate further in medical tourism.
• Clean Energy: The Clean Energy Sector is having a very high level of potential for cooperation between the two countries and Indian companies with expertise in the renewable energy sector can invest in UAE.
• Defense: In the defense sector, both the countries can enhance their cooperation through joint training programmes.

News Source: The Hindu