The Reserve Bank of India (RBI) and the Central Bank of the United Arab Emirates (UAE) recently signed two significant Memoranda of Understanding (MoUs) to strengthen economic connections between the two countries. This occurred during Prime Minister Narendra Modi’s visit to the UAE. These agreements have the potential to have a substantial impact on trade volume, remittance flows, and financial inclusion. They aim to boost cross-border trade in local currencies and improve the efficiency of payment systems.
GS Paper 2: Bilateral relations
What advantages would the Local Currency Settlement System (LCSS) between India and the UAE provide to exporters and importers in both nations, and how will it advance bilateral commerce and investment?(150 words)
India UAE Relationship
- The United Arab Emirates (UAE) opened an embassy in Delhi, and India responded by opening an embassy in Abu Dhabi the following year. India and the UAE first established diplomatic relations in 1972. The visit of Prime Minister Narendra Modi to the UAE in August 2015, which signalled the start of a new strategic alliance, significantly improved the two nations’ bilateral relations. During his visit to the UAE in August 2019, PM Modi received the Order of Zayed, the highest honour bestowed by the country in honour of the deepening ties.
- Economic and commercial ties have existed between India and the UAE for centuries. The dynamics of trade dramatically changed in 1962 after oil was discovered in the United Arab Emirates. Bilateral trade was further driven by the rise of Dubai as a major regional trading hub and India’s economic liberalisation effort in the early 1990s. Currently, commerce between the two countries is around US$ 72 billion, with the UAE ranking as India’s second-largest export market and third-largest trading partner. Over $12 billion has been invested by the UAE in India through Foreign Direct Investment (FDI), which has grown over time.
- Cultural Relations: India’s participation as the Guest of Honour Country at the Abu Dhabi International Book Fair in April 2019 is evidence that the UAE values Indian culture. There is a sizable audience for Indian films, television, and radio in the United Arab Emirates. A number of yoga and meditation centres are growing in the UAE, and the Emirati community enthusiastically participates in India’s annual International Day of Yoga celebrations.
- Technology Partnerships: India and the UAE have entered into numerous agreements relating to digital innovation and technology. Plans call for cooperation on missions like the Red Moon mission between the UAE Space Agency (UAESA) and the Indian Space Research Organisation (ISRO). Indian professionals have been drawn to the UAE by its “golden visa” residency permits for professionals in high-end technical fields; former ISRO chief K. Radhakrishnan has joined the UAE’s space agency.
- Defence and Security Cooperation: Under the comprehensive strategic partnership formed in 2017, defence cooperation between India and the UAE has been progressively expanding, with high-level exchanges, port visits by navy ships, and yearly defence talks. To improve bilateral defence cooperation, military commanders have visited both nations and both take part in military drills.
- The UAE has served as a mediator between India and Pakistan by arranging meetings for participants, such as NSA Doval and Pakistani military leaders.
- Indian Community: With 3.4 million members, the Indian expatriate population in the UAE is the largest ethnic group, making up roughly 35% of the total population.
- Relationship difficulties include the most recent turmoil brought on by Indian people’ divisive remarks against the Prophet Mohammed.
- Maintaining a balance in geopolitics between UAE links with China and India’s ties to Iran.
- Disagreements over energy pricing, with India calling for a price cap as a big oil consumer and the UAE taking a different position as an OPEC nation.
- The requirement to revise the aviation services contract in order to take into account UAE’s demand for more flights to India.
- The treatment of minorities in India and events like the CAA protests and the Hijab Ban have generated concerns in Gulf countries.
- Indians are not granted citizenship in the UAE, and labour camp conditions have been a cause of worry.In the past, legal concerns have made it difficult for foreign investments to enter India, hence streamlined procedures and processes are required.
- The relationship between India and the UAE has developed into a strategic partnership with significant defence, commercial, and technological collaboration. Despite obstacles, both nations continue to seek to deepen their relationships and resolve shared issues. The sizeable Indian expatriate population in the UAE is crucial to developing intercultural exchanges and advancing the development of both countries.
Local Currency Settlement System (LCSS)
To facilitate exchanges between the Indian rupee (INR) and UAE dirham (AED), the first MoU focuses on developing a Local Currency Settlement System (LCSS). The system includes all allowed and current capital account transactions, giving exporters and importers a solid foundation on which to carry out business in their respective native currencies.
Benefits of LCSS Implementation:
- Reducing Exchange Rate Risks: By denominating export contracts and invoicing in local currencies, exporters are able to offer more competitive pricing since the exchange rate risks associated with utilising a third currency as a standard are reduced.Additionally, it might open up more opportunities for collaboration between the banking systems of the two nations, boosting commerce and economic activity in both. Mineral fuels, oils, and products, bituminous materials, and mineral waxes are the main exports from India to the UAE, with pearls, precious stones and metals, electrical gear and equipment coming in second and third, respectively. India imports a large amount of petroleum crude and goods related to that industry. Increasing to $85 billion in 2022, India-UAE trade. Additionally, in FY2022-23, the UAE was India’s second-largest export market and third-largest trading partner. The UAE’s second-largest trading partner was India, on the other hand.
- Stabilising the INR-AED Exchange Market: By increasing liquidity and enabling more seamless cross-border transactions, the promotion of local currencies contributes to the growth of the INR-AED foreign exchange market.
- Increasing Remittances and Investments: The LCSS is anticipated to encourage remittances and investment between India and the UAE. Due to the ability to transact in one’s own currency, it encourages more cross-border investment.
- Optimising Transaction Costs: With streamlined transaction costs and decreased settlement time, the LCSS will make cross-border transactions, including remittances, more efficient and cost-effective.
Integration of UPI and IPP for Efficient Fund Transfers:
Linking Payment SystemsThe second MoU focuses on connecting the UAE’s Instant Payment Platform (IPP) and India’s Unified Payments Interface (UPI). Additionally, in order to promote smooth communication and transactions between various payment service providers, the agreement calls for the interlinking of two card switches, RuPay switch and UAESWITCH.
Benefits of Card Switch Linkage with UPI-IPP:
- Quick, Easy, and safe Cross-Border Fund Transfers: Users in India and the UAE may make quick, easy, and safe cross-border fund transfers thanks to the combination of UPI and IPP. The ease of conducting business between the two countries will increase thanks to this feature, which will promote economic cooperation.
- Increased Remittance Flows Remittances are frequently burdened by high transaction fees and exchange rate margins, especially for low-wage workers. These issues are resolved by the UPI-IPP linkage, which improves the effectiveness and affordability of remittance flows for migrant workers.
- Increasing Payment Options and Cooperation: By encouraging cooperation between India’s and the UAE’s banking systems, the interlinking of payment systems strengthens economic relations and promotes growth in trade and economic activity.
- Financial Inclusivity for Non-Resident Indians (NRIs): The UPI ecosystem is made more inclusive by incorporating non-resident accounts with international numbers. NRIs can actively participate in India’s digital payment system, including those who live in the UAE, which improves cross-border financial integration.
Other current projects and remittance trends include:
- Partnership with PayNow in Singapore: To enable cross-border real-time money transactions, the National Payments Corporation of India (NPCI) partnered with PayNow in Singapore in March. Remittances were intended to become more effective and efficient through this strategic cooperation. According to representatives of the Monetary Authority of Singapore (MAS), this partnership would result in remittances becoming 10% less expensive, which would help both Indian migrants in Singapore and their relatives back home.
- Onboarding of Non-Resident Accounts into the UPI Ecosystem: In January, the NPCI approved the onboarding of non-resident accounts with international numbers from ten nations, including Singapore, Australia, Canada, Oman, Qatar, the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, and Hong Kong. By enabling non-resident Indians to actively engage in India’s digital payment system, this action increased financial inclusion.
Remittance Trends and the World Bank’s Observation:
- The World Bank’s 2023 Migration and Development Brief outlined important developments in India’s remittance inflows. Remittances to India increased significantly in 2022, rising by a whopping 24.4% to a total of $111 billion. This shows that the Indian diaspora’s financial support for their families back home in India has not decreased. The fact that this sum accounted for 3.3% of India’s GDP highlights the importance of remittances to the nation’s economy.
- A rise in remittance inflows from Gulf Cooperation Council (GCC) nations, which account for about 28% of all remittances to India, was also mentioned in the report. High energy prices, which favoured the employment and salaries of less-skilled Indian migrants in GCC countries, were among the factors cited as contributing to this development. Additionally, the GCC governments’ unique initiatives to reduce the inflation of food prices aided migrants’ ability to send money, which increased the flow of remittances to India.
- According to the research, high-skilled and primarily high-tech Indian migrants in nations like the United States, the United Kingdom, and Singapore are responsible for around 36% of all remittances. This shows how significantly qualified Indian professionals who work abroad contribute to India’s remittance inflows.
The RBI and the Central Bank of the UAE signed two key MoUs to assist the India-UAE trade deal, which has the potential to significantly deepen economic connections and advance financial inclusion. By encouraging the use of local currencies in cross-border transactions, the LCSS will reduce exchange rate risks and increase investments and remittances. In addition, the linkage of payment systems will facilitate fund transfers between India and the UAE and improve remittance flows, which will be advantageous for the economies of both countries. These strategic agreements represent an important step in promoting prosperity, cooperation, and economic progress between India and the UAE.