Gulf states and India seek trading future

By Jeremy Howell
BBC World, Middle East Business Report, in Muscat

Next month, India and the bloc of oil-rich Arab states - the Gulf Co-operation Council - will start talks on free trade and economic co-operation.

South Asian workers flock to the Gulf to seek work

The two sides aim eventually to reduce tariffs and blocks on investment - no small task, given the formidable legal barriers to foreign competition in their home markets which both have erected in the past.

But the motivation to move on - in the shape of some $50bn a year in trade across the Indian Ocean - is strong.

The Gulf is a major supplier of oil to India. Meanwhile, India is a major exporter of labour to the Gulf, with an estimated four million Indians earning their livings there.

Energy-hungry

The biggest driver for the new trade talks is India's demand for more oil to fuel its future development, and to sustain its current 7% annual economic growth.

The El Dorado states of the Gulf are looking for new regions of the world in which to invest their surplus petrodollars, and India offers itself as a low-cost, labour rich base for manufacturing and industrial processing.

"There are synergies here", says India's Minister of Commerce and Industry, Kamal Nath, who was in Oman's capital Muscat at the GCC-India Business Conference last week. "One of those synergies is obviously going to be oil.

"India could be building refineries for the conversion of oil in a much more efficient, economical manner than in the past. We could make downstream petroleum products.

While India has eliminated many rules and restrictions, I think there is more, high-speed work to do Hussain bin Salman al-Lawati, Oman Cables

"These are all things which are going to be the new architecture of tomorrow."

Back to the future

This is not the first time the Indian and Arab worlds have courted each other.

Some historians believe trade between the two has been going on for the past 7,000 years, and that in prehistoric times the Eastern coast of the Arabian peninsular and the Western coast of India were part of the same sea empire.

And now the intermingling between the economies on either side of the Indian Ocean is happening again.

Oman Cables is one of the Gulf's largest manufacturers, making electricity cables at its plant in Muscat for worldwide distribution.

Its managers are keen to penetrate the Indian market, foreseeing a four- or fivefold increase in Indian electricity production over the next two decades.

Recently, Oman Cables has taken over management of a cable company in India and is looking to expand production there.

What's holding that back, says managing director Hussain bin Salman al-Lawati, is India's restrictions on the freedom of firms to transfer machinery into India from their factories abroad.

"If I have an factory in Oman and a factory in India." he says, "I want to be able to transfer capital equipment from one to the other, according to economic conditions.

In contracts, it is often specified that European goods are used in production MV Satish, Larsen and Toubro

"I have been in touch with India since 1975 and while it has eliminated many rules and restrictions, I think there is more, high-speed work to do. This is what we are looking for in the GCC, and I am sure Indian investors feel like me."

Who owns what?

But investment is not a one-way street - so how does the Indian side feel?

Many giant Indian companies have come to the Gulf to tap the construction boom here.

One is the engineering firm Larsen and Toubro. It has multi-million dollar contracts to build roads and factories in Dubai and Oman. It wants to invest $100m on building its own production plants in the Gulf.

But Indian investors are held back by the ownership rules in Gulf states. In most countries, and in most industrial sectors, foreign companies are required to share their operations on with a local investor, and split the profits with them as well.

The Gulf's ports are the origin of massive oil exports to India

Potential Indian investors in the Gulf also feel sore about the traditional Arab preference for European-made equipment and machinery over Indian equivalents.

"In contracts, it is often specified that European goods are used in production," says MV Satish, Chief Manager of Larsen and Toubro's operations in Oman.

"They are preferred because they are time-tested. But once the economies are liberalised and this new free trade agreement is in place, it will be up to us to prove that Indian products are as good as any in the world."

Negotiations

It will take many rounds of talks to construct a trade and investment pact with which both India and the Gulf states can be satisfied.

But the news that these talks are going ahead is significant in itself.

It comes very soon after the DP World affair when - in Arab eyes - the USA, an apparent champion of free trade, slammed its doors to Arab business.

So Gulf states are now conspicuously looking to opportunities elsewhere.

In the words of one government minister in Muscat, "the trade winds are shifting from West to East".