Lotus in the desert: The burgeoning India-Middle East relationship
February 2023 Al-Monitor PRO Trend Report
Columns of heavy arms and infantry regiments rumbled down New Delhi’s ceremonial Kartavya Path on Jan. 26 as India commemorated its 74th Republic Day, an annual celebration of its constitution’s enactment. Standing beside Prime Minister Narendra Modi observing the spectacle was Egyptian President Abdel Fattah al-Sisi, this year’s guest of honor.
The decision to invite Sisi as “chief guest,” no small privilege, “reflected the importance attached by India to the relationship with Egypt,” a joint statement published by India’s Ministry of External Affairs proclaimed. During the visit, the two countries vowed to enhance cooperation on all fronts. New Delhi said it would “encourage” Indian companies to invest in Egypt, while Cairo promised new incentives to attract them. Egypt’s delegation also floated the possibility of granting Indian corporations special building rights in the Suez Canal Economic Zone. Though not beholden to specific commitments or timetables, the pledges signaled the intentions of both parties to deepen their strategic and economic relations.
To many experts, Sisi’s visit epitomized a broader recalibration in India’s relationship with the Middle East. Modi and his MENA counterparts have proactively intensified ties in recent years. Succumbing to geopolitical and domestic pressures, they are securing long-standing diplomatic and commercial connections with comprehensive strategic agreements. This integration is not a fad. Strong mutual interests in energy, investment, and security will continue to draw India and the region closer in the years to come.
1. India-MENA Relations: State of Play
The crux of the Indo-MENA relationship is energy. For decades, “the relationship has been dictated by India’s requirement of oil and gas,” Saon Ray, professor at the Indian Council for Research on International Economic Relations, told Al-Monitor. Petroleum products covered roughly 26% of Indian energy demand in 2019, according to the International Energy Agency. Around 80% of that oil was imported. Gulf countries — principally Iraq, Saudi Arabia, and the United Arab Emirates — supplied more than 60% of it. The share of Indian petroleum imports from the Gulf has hovered between 60-70% since 2009. Natural gas, meanwhile, covered 6% of Indian energy demand in 2019 (the IEA expects this share to nearly double by 2040). That year, India imported roughly 50% of the natural gas it guzzled; and 59% of that amount arrived from the Gulf.
It is unsurprising, then, that “India’s foreign policy in the region has centered, for all practical purposes, on the Gulf” since the late 1990s, Anwar Alam, a senior fellow at the Policy Perspectives Foundation, observed. The MENA region accounted for around a quarter of India’s total bilateral trade during the 2021-2022 fiscal year; the Gulf Cooperation Council made up 64% of India’s regional commerce. The Council’s leading powers, the UAE and Saudi Arabia, are India’s third- and fourth-largest trading partners respectively. The UAE was India’s largest trading partner for much of the mid-2000s before being leapfrogged by China and the USA.
That same year, the GCC became India’s largest global trading partner bloc. Fossil fuels comprised two thirds of the $110 billion in imports arriving at Indian ports from the GCC. Refined petroleum products and valuable gems accounted for around a third of the roughly $44 billion in goods India sent the other way.
Indian and GCC leaders have been keen to deepen and diversify their trade. In November, both parties agreed to accelerate free trade agreement negotiations. Months earlier, India and the UAE finalized a comprehensive economic partnership agreement (CEPA). The sweeping deal promises an 80% cut in tariffs on all goods exchanged between the two countries. Government economists predict (or hope) that it will boost non-oil trade by $40 billion within the next four years. The agreement also lays the groundwork for future discussions on defense cooperation, technology exchange, and food security. The UAE, for its part, announced plans to grant upwards of 140,000 visas to skilled Indian nationals by 2030.
The CEPA is the latest of several recent high-profile measures designed to strengthen Indo-Emirati economic and diplomatic relations. Modi’s 2015 visit to the UAE — the first by an Indian PM in 34 years — forged a “comprehensive strategic partnership” between the two countries. The new allegiance was underpinned by a bundle of agreements on commerce, investment, and defense. The UAE notably pledged to invest $75 billion in Indian infrastructure projects over the coming years, and the countries established a UAE-India Business Council to facilitate investments and trade. Cooperation in space and technology development also featured on the agenda.
Subsequent agreements have given shape and substance to this partnership. The countries reinforced the 2015 pronouncement with a strategic partnership pact and 14 corresponding defense and economic agreements in 2017. The UAE’s sovereign wealth fund has since poured billions of dollars into Indian IT and agritech sectors. In 2019, the countries established a “fast-track mechanism” to streamline such Emirati investments. In February 2017, Emirati engineers enlisted the help of India’s seasoned space scientists to launch the Nayif-1 nanosatellite into orbit. The following year, the pair announced the creation of the “UAE-India AI Working Committee,” a cooperative of techies and investors designed to generate $20 billion in AI-driven growth over the next decade.
India has also enriched ties with other countries across the region. Saudi Arabia and India upgraded their relationship to “strategic partnership” status in 2010; the new partners formalized commitments to promote “infrastructure, energy and development, by augmenting the flow of their investments into each other’s countries, and enhancing the bilateral trade in accordance with the potential and size of their economies,” in the Riyadh Declaration.
The countries made progress on these pledges in the years since. On his first of two visits to New Delhi in 2019, Saudi Crown Prince Mohammed bin Salman vowed to invest $100 billion in Indian IT, refining, petrochemicals, infrastructure, agriculture, and manufacturing. Saudi Aramco teamed up with the Abu Dhabi National Oil Company the previous year to develop a $44 billion refinery in Maharashtra, a keystone of India’s bustling refining industry. The kingdom’s Public Investment Fund has also pumped billions into Indian tech and retail firms. Since 2016, the Saudis and Emiratis have more than quintupled their share of FDI inflows into India.
India has also defrosted once frigid relations with Israel. India is now the world’s largest importer of Israeli military gear (accounting for 46% of Israel’s total arms exports); analysts expect the Indo-Israeli arms trade to balloon to $130 billion over the next five years. After an exchange of state visits in 2017 and 2018, the two countries signed a slew of agreements to boost cooperation in “R&D innovation, water, agriculture and space” as well as “cyber security, oil & gas cooperation, film co-production and air transport.” India has proactively tapped Israeli agritech expertise to shore up the country’s food and water security. Indian companies have, in turn, expanded their presence in Israel. A consortium led by the Adani Group, an Indian multinational conglomerate (now being gutted by short sellers), finalized its purchase of the Haifa Port in early January.
Labor also unites India and its MENA partners. As of 2018, nearly 9 million Indian expatriates lived in the Middle East; 8.5 million lived in the GCC nations, where they constitute over 30% of the bloc’s expatriate workforce. Around 3.1 million Indians (about a third of the overall population) live in the UAE; 2.8 million live in Saudi Arabia. This expatriate labor force forms the backbone of the Gulf’s economic development. “Every major project in the region, from Kuwait to Oman, has an Indian fingerprint,” Talmiz Ahmad, a former Indian ambassador to Saudi Arabia, the UAE, and Oman, told Al-Monitor. “The huge Indian diaspora provides a good market,” Girijesh Pant, a professor at Jawaharlal Nehru University, added. “A good percentage of the economy depends on the consumption of these expatriates living there.” From an Indian point of view, its diaspora in the Gulf is a vital source of remittances. Indian expatriates in the Gulf sent nearly $40 billion back to the country in 2017 (around 1.5% of Indian GDP).
2. India-MENA Relations: MENA Looks East, India Looks West
Indo-MENA relations were not always this strong. For much of the 20th century, India was politically peripheral, its economic engagement shallow. “In the 1980s and 90s, India’s state incapacity and particularly its lack of economic progress meant that [it] played a subdued role in West Asia, as a ruler taker rather than a rule shaper,” Gopi Bhamidipati, a contributing researcher at the Arab Gulf States Institute in Washington, told Al-Monitor. New Delhi especially neglected the Gulf countries, which it deemed to be too aligned with political Islam and America’s Cold War bloc. “Through most of the Cold War, India did not have substantial political relations with the Gulf countries,” Ahmad remarked. “Our focus was on the republics.”
This began to change in the 1990s. India’s economy grew and industrialized rapidly over the course of the decade, driving up its demand for fuel. “By the end of the last century, India became one of the most important importers of oil and, later, of gas,” Ahmad noted. “This made India a very attractive market for the energy resources of the Gulf.” Meanwhile, Gulf countries, undergoing their own economic transformations, began to rely heavily on cheap, reliable Indian labor to drive growth.
These ties intensified substantially during the 2010s. Narrow deals soon gave way to expansive partnerships. “The biggest change over the last 20 years or so has been that transactional relations have transformed into strategic partnerships,” Narayanappa Janardhan, a UAE-based political analyst, told Al-Monitor. “The term ‘strategic’ is becoming important in all this.” Ray agreed, stressing that “it shouldn’t be seen as just enhancing economic ties. It should be seen as more than that.” Partnerships, Bhamidipati noted, “are temporary alignments, focused on specific issues of mutual interest” more encompassing than transactions of decades past.
The Modi administration has been particularly adamant about bolstering India’s presence in its western periphery. Modi visited the MENA region 10 times during his first term (2014-2019), more than double the number of visits his predecessor conducted during the whole of his 10-year tenure. In particular, “Mr. Modi prioritized India’s relationship with the Gulf when he became prime minister,” Ahmad noted. “From 2015 onward, he has maintained a robust tempo as far as these relationships are concerned.”
A number of domestic trends help explain this shift. Modi aspires to lift India to great power status. To sustain its above-average economic growth and provide for its ballooning population, the country must secure its energy inflows — and Gulf countries will continue to be an essential source of fuel. Another “question occupying the Indian establishment is how to attract Gulf money to the Indian market,” Alam remarked. Boosting foreign investment inflows is a key pillar of India’s economic growth strategy. The Gulf, Ahmad noted, is “flush with funds.” As such, he added, “it is [India’s]business to come up with projects that are mutually advantageous.”
Gulf countries, meanwhile, aiming to diversify their own economies, are eager to invest abroad. “India is also seen as a major and credible market for their investments,” Ahmad observed. “We are cautious, we are careful, but we are also dynamic; we have companies looking towards the future.” India has, in turn, readily invested billions in the region, though small markets and subdued innovation continue to taint MENA’s economic allure. The subcontinent is also a vital source of food for a region beset by arid climate and low agricultural production.
There are also geopolitical dynamics at play. India fears being boxed out of the region by a rapidly expanding China. “What India has tried to do in West Asia has been in some sense to balance and recently counterbalance China because of the Belt and Road Initiative,” Ray observed. MENA countries, adjusting to America’s declining hegemony, are searching for new strategic partners on their own accord. “It’s a multi-power world; middle powers don’t want to get caught up in a super power rivalry,” Janardhan argued. “They want to build their own projects, with or without the involvement of the super powers.” Keen on “seeking comprehensive ties with the entire world,” he added, “[MENA middle powers] are more inclined towards focusing on capital, commerce, connectivity, and collaboration.”
A willingness by both parties to put aside ideology has facilitated productive diplomacy. “The foreign policies of the Gulf have become less ideological and more pragmatic,” Janardhan noted. Saudi Arabia and the Emirates have actively distanced themselves from the Islamist currents that drew on their support in the past. The Modi administration, meanwhile, has managed (so far) to prevent its anti-Muslim domestic discourse from poisoning its foreign relations with Muslim nations. “Indian foreign policy is also very non-ideological, irrespective of what its domestic policies are about,” Janardhan remarked.
3. India-MENA Relations: 2023 Outlook
• The coming year portends few (if any) significant shifts in the Indo-MENA relationship, according to experts. “I don’t envision any drastic changes taking place,” Pant summarized simply. India and its MENA partners are keen on developing their relationships, building upon past agreements and putting promises into action. Where comprehensive accords have laid the groundwork for substantive government cooperation, expect relations to progress at the sub-government level. “The fact that there is a great deal of government-to-government relations over the last few decades has meant that people-to-people and business-to-business relations have also grown, and that will continue to grow as we move forward,” Janardhan forecasted.
• India’s CEPA agreement with the UAE may also open other doors to economic cooperation across the region. “[The CEPA] will provide India a good opening into the Gulf countries,” Pant predicted. Ray concurred, adding that “The FTA with the UAE has been seen in some circles as a gateway to the region and to Africa.”
• Despite deepening engagement, experts don’t foresee any seismic spikes in trade or investment. “The flow of investments is pretty slow,” Alam noted. The grand predictions of economic growth made at signing ceremonies don’t always pan out, and if they do, the impact of success is gradual. “It’s very easy for the government to declare certain numbers,” Pant added, “but to translate these numbers into actions remains a separate issue.”
• India seems poised to continue what Ray dubbed its trade agreement “signing spree.” Energized by its CEPA with the UAE, India may accelerate the talks it has in the works and jumpstart others. India resumed free trade talks with Israel in June 2022. Negotiations commenced in 2010 but soon stalled. Indian officials are now insisting that Israel agree to lower tariffs on services before finalizing an agreement. When or how exactly the impasse will be resolved is unclear. Given the formidable bedrock of cooperation upon which they are building, however, this obstacle hardly seems insurmountable, and an Indo-Israeli FTA may be imminent.
• India also signaled interest in inking a trade deal with Oman in 2021. The sultanate is one of India’s largest regional trade partners and investment destinations. In May of last year, the countries agreed to launch a “joint feasibility study” to explore the possibility of a limited trade deal. The Indo-Emirati agreement may also expedite the push for a GCC-wide free trade agreement.
• Though it will continue to rely heavily on petroleum imports from the Gulf, India intends to diversify its energy intake. “For a country that’s importing a large part of its energy basket, you need to diversify and secure your energy resources,” Ray reasoned. Russia, for instance, supplanted Iraq as India’s top oil supplier in November; oil inflows from Russia have only increased since, as India (and China) take advantage of steep discounts precipitated by Western sanctions on Russian fuel.
4. Case Study: India, Israel, the UAE — A New Regional Cohort?
Strong mutual interests on a range of issues and sturdy economic linkages have positioned India, Israel, and the UAE, in the eyes of many experts, as natural partners in the new regional order. “There’s a natural synergy between these countries in terms of what they go about doing,” Janardhan remarked. “Israel is rich in technology; UAE has the capital; and India has the market.” The Abraham Accords, ratified in 2020, unleashed billions of dollars worth of trade between the UAE and Israel (and minimized the political stigma of doing business with Israelis). The 2022 Indo-Emirati CEPA hopes to enhance already burgeoning commerce between the two countries. Together, experts say, the agreements prop open an economic corridor that could generate $100 billion in trade among the three countries by the end of the decade.
The trio have already showcased their instincts for coordination and cooperation. In June 2022, leaders of the three countries, along with the US, congregated on a video call for the inaugural meeting of I2U2, a “narrower, informal, and adaptable” minilateral grouping designed to boost cooperation in “water, energy, transportation, space, health and food security.” The partnership, intended to enhance collaboration without strict commitments, has already begun to yield some fruit. A few weeks after the first meeting, India set aside land to construct food parks with $2 billion in I2U2 partner funding.
India, Israel, and the UAE have forged ahead on a number of fronts without American involvement. The countries signed a trilateral pact in May 2021 to produce Israeli-designed robotic solar panels in India for use in the UAE. The trio are also constructing an “India-Middle East Food Corridor.” Motivated by MENA concerns about food security and Indian desires to improve their food production, the plan fuses cutting-edge Israeli agritech, Emirati funds, and Indian production capacity to develop “a resilient 21st century food supply chain.”
In 2019, Emirati logistics and shipping firms earmarked $7 billion to support the corridor project. DP World, an Emirati logistics giant, began constructing a 93,000 square-meter food shipping facility near Mumbai’s Jawaharlal Nehru Port in January 2021. Sharaf Group, another Emirati conglomerate, has invested $300 million of a pledged $1 billion in logistics infrastructure and storage facilities across India.
Israel, meanwhile, has invested heavily in improving Indian agricultural capacity. Israeli think tanks and firms have partnered with Indian counterparts to introduce and implement novel agricultural technologies and techniques, such as fertigation, drip irrigation, and biostimulants. Israel established 29 agricultural training centers across the country between 2012 and 2015, training 150,000 Indian farmers in 2019 alone.
5. Key Takeaways
• Experts expect Indo-MENA integration to continue over the coming decade. “The specifics might differ, but the broad trend is greater integration,” Ray forecasted. “Barring very disruptive geopolitics, we’ll see this trend continue.” Ahmad predicted “more of the same, but perhaps more substantial.” Given strong mutual economic and strategic interests, Alam doesn’t foresee “India having problems deepening its relationship with…the GCC governments” or forging stronger partnerships with Egypt or Syria.
• In particular, experts anticipate the I2U2 partnership to solidify Indo-Israeli-Emirati relations. “The momentum of the UAE-India CEPA, and growing trade between Israel and both these countries, provides a good base for substantially expanding economic cooperation within this new partnership” Janardhand remarked in an essay on the group. “Adding Israel as a third partner and transforming the India-UAE CEPA into a trilateral trade agreement could clear existing trade and regulation bottlenecks and substantially enlarge trade volumes that are already growing between and among the three partners.”
• Though India and MENA countries have pledged to cooperate on renewable energy production, fossil fuels will remain the crux of the relationship. “For at least the next 20-30 years, [India is] looking at a fossil fuel future,” Ahmad noted. The IEA estimates that petroleum products will continue to cover between 30-40% of Indian energy demand through 2040, and the Gulf will continue to be a vital source.
• Success and prosperity are not guaranteed. A number of potential headwinds loom on the horizon. For instance, experts disagree over whether or not India and China can prevent their competition in the region from spiraling into conflict. Ahmad struck an optimistic note. “China will seek peace and stability for its Belt and Road initiatives,” he said. Meanwhile, “India will seek peace and stability for its own economic interests and the safety of its community.” Janardhan largely concurred with the ambassador’s assessment. “There will be cooperation; there will be some amount of competition,” he predicted. “I don’t think India will be a part of any confrontation that takes place in this part of the world.” Others are more pessimistic. “The Indian position was that the world was big enough for India and China to participate economically and compete; I think that perception is changing within the Indian establishment,” Alam remarked. “The perception now is that the Chinese motivation is not entirely economic, but that it’s hoping to squeeze India on strategic and territorial issues.” Deadly border clashes between the two Asian powers cast a dark shadow over Indo-Sino competition in other parts of the world. MENA states don’t want a new Cold War, but they may not be able to avoid one.
• India will seek to balance its relationships with both Iran and the GCC. In the past, India has been able to skirt GCC-Iran tensions and pursue economic initiatives with both countries. India and Iran forged a strategic partnership in 2003, seven years before India did the same with the Saudis. In recent years, however, India has had to work around its economic ties with the Islamic Republic to accommodate American leaders intent on economically and diplomatically isolating the country. Western sanctions on Iranian trade have strangled once vibrant Indo-Iranian energy cooperation. Despite not sharing American hostility towards Tehran, Indian leaders are wary of compromising a growing number of agreements with Washington over its relations with Iran. Alam believes New Delhi will struggle to sustain its current balancing act. “Sooner or later, India has to improve its relationship with Iran,” he said. “Part of the reason is the diversification of its energy resources. Iran also provides a massive market.”
• Domestic issues, though peripheral until now, may also complicate matters. The anti-Muslim vitriol of Modi’s BJP may soon drag down his foreign policy ambitions. “Even though the Modi government is very much pragmatist, and it doesn’t want to be seen on the global stage as being anti-Muslim, his electoral strategy demands that he remain a Hindu nationalist figure,” Alam warned. “Sooner or later, this will become a critical issue.” Janardhan suspects that India — and its MENA counterparts — will continue to overlook domestic differences, so long as their partnerships prove fruitful. “Domestic factors don’t have too much of an impact on foreign policy issues, and one shouldn’t read too much into it,” he said. “I don’t think they have the potential to change the relations between the GCC countries and India.”
• Whether or not India will remain an attractive market for foreign investment is also uncertain. “A large part of how India-GCC relations will grow depends on whether or not India is able to maintain its growth potential,” Janardhan said. “If its economic growth doesn’t match the potential that people have made it out to be, it will suffer on all fronts.” Indian policymakers have reason to be hopeful, however. Standard and Poor’s predicts that the Indian economy will grow at an average annual rate of 6.3% through 2030, eventually overtaking Germany and Japan in size — good news for Indian firms and their MENA patrons.
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