India Strengthens Economic Ties With West Asia Amid US Tariff Pressure

India has close links with many West Asian countries, but economic and cultural ties are most deeply enmeshed with the United Arab Emirates (UAE). One reason is the flourishing Indian diaspora that makes the emirates a home away from home for citizens.

It is no wonder that exporters looking for alternative markets in the wake of hefty US tariffs are seeking to pivot to the UAE. Prospects of shifting some proportion of exports to the thriving markets of the Gulf countries are now being considered a real possibility.

Earlier this year, the UAE and India also signed a Memorandum of Understanding (MoU) with Sri Lanka to jointly develop Trincomalee as an energy and logistics hub - a move that will benefit all the three countries.

In fact, Prime Minister Narendra Modi was the first Indian PM in 34 years to visit UAE in 2015. The Prime Minister visited UAE as many as seven times, the last one being in February 2024.

It must be recalled that the potential for expanding both trade and investment ties with the UAE was tapped in a big way only after the conclusion of the free trade agreement in 2022. It was the first FTA to be concluded after a decade and ended up propelling trade flows to record levels.

Bilateral trade shot up from US$ 43.3 billion in 2020-21 to US$ 100 billion in 2024-25. Growth is now needed in the non-oil and non-precious gems sectors where trade has risen more slowly.The new target for the non-oil and non-precious gems segment has been set at US$ 100 billion from the current level of US$ 55 billion annually.

India Woos UAE

Commerce Minister Piyush Goyal’s latest trip to the UAE along with a high level industry delegation is undoubtedly meant to ensure that the momentum in trade ties continues to be robust in the coming years. 

It assumes deeper significance coming as it does when exporters are reeling from the impact of the Trump administration’s 50 per cent tariffs. The focus on the UAE also comes immediately after visits by two European Union commissioners seeking to step up the pace of negotiations for the India-EU free trade agreement. 

The progress made during these talks prompted Goyal to declare that the forthcoming trade deal would be a win-win scenario for both sides. In other words, a proactive approach is being taken to explore markets and investment opportunities with major trading partners to ensure exporters have diverse options at a time of global economic uncertainty.

Ensuring Economic Growth 

There is clearly a determination to ensure that economic growth does not get weighed down by the impact of U.S. tariffs that are expected to affect as much as US$ 55 billion worth of exports. Even though trade talks with the U.S. are now set to resume, it is possible that the final agreement could end up being of a limited nature. 

Chief Economic Advisor Ananth Nageswaran may have expressed optimism that the 25 per cent punitive tariffs will be removed within the next two months, but there is little certainty on any issue, given the erratic nature of Trump’s policy pronouncements.

In this backdrop, the move to increase engagement with the UAE is a pragmatic initiative. Not only is it a fast growing market, it has become a hub for business activity from neighbouring regions like Africa, West Asia and Central Europe. 

The emirates are also looking to expand investments in this country in infrastructure, technology, banking and green energy. Among the areas identified for project collaboration are renewable energy, shipbuilding, pharmaceuticals and the retail sector.

Trade In Local Currencies 

Another critical area that formed part of the discussions during Goyal’s visit was settlement of bilateral trade in local currencies, that is, in rupees and dirhams. An agreement on using local currencies for transactions between the two countries was concluded earlier in 2023 but progress has been slow in this regard. 

On the plus side, India’s United Payments Interface (UPI) is now already available for use in many parts of the UAE. This has eased much of the payment problems faced by business and tourists. 

Other hurdles in implementing the trade in local currencies will now have to be resolved so that the ease of doing business for small and medium enterprises increases in the Gulf country. In the long run, enabling rupee - dirham transactions is expected to enable Indian manufacturers to use the country as a hub to supply to the entire West Asian region.

At the same time, it must be accepted that entering into transactions in local currencies with a few countries will not displace the dominance of the dollar as the global reserve currency. 

But it can reduce transaction costs for Indian businesses and also make exports more competitive in the UAE. Entering into such agreements with major trade partners can provide another boost to the export sector, though so far it is confined to only a few countries. This includes Russia with which the rupee payment mechanism has been in operation for many decades.

Expanding Trade Horizons 

While economic ties with the UAE are thus being deepened in many ways, this engagement is being extended to other countries in the region. Talks are now underway for yet another free trade agreement with Oman, while other countries in the region, like Qatar, are also reported to have shown interest in entering into such pacts. 

The earlier plan for an overarching free trade deal with the Gulf Cooperation Council has not gotten off the ground, probably because of the widely differing interests of the bloc members.

Bahrain, Kuwait, Saudi Arabia, Oman, Qatar, and the UAE are members of the GCC, which has become India’s largest bloc trading partner. India-GCC trade touched  US$178 billion in 2024-25, accounting for 15.4 per cent of this country’s total trade. 

Even though much of the trade involves imports of crude oil and natural gas, there is considerable scope for enhancing exports of both agricultural and industrial goods to the region.

The focus on the Gulf region comes even as a defence pact between Saudi Arabia and Pakistan has been concluded in recent days. This agreement is bound to cause concern in New Delhi despite the multilayered relationship that has been built up over the years with Saudi Arabia. 

This is an issue that will need to be considered as a long-term strategic issue. The need of the hour in the short run, however, is to strengthen economic relations with West Asia, especially the UAE, in the backdrop of external headwinds in the form of the tariff walls being raised by the U.S.