Trade between Arabian Peninsula and the Indian Subcontinent goes back to ancient times. The rise of Islam of course acted as a spur to commercial links between the two regions, with Makkah the great destination. On the other side of the peninsula too, the Gulf became during the golden age of Muslim power and culture the great commercial highway between the Baghdad-based Abbasid Caliphate and the East. But even long before that Arabia was, of necessity, a major entrepot, positioned as it was on the sea-borne trade routes between East and West. The few remnants surviving from Eve’s Tomb in Jeddah show a distinctive Indian design which suggests that centuries before the rise of Islam, Indian traders were busy here and Arab traders busy out east.
Until quite recently, however, it has been a much quieter story. Reflecting the politics of the Cold War period in which India was regarded as closer to the Soviet camp, trade between the two countries was a rather limited affair — mainly rice, tea and fabrics from India and from Saudi Arabia of course oil, but not a great deal compared to exports to the West and Japan at the time or to present-day sales to India.
This relatively low level of trade was in marked contrast to the large presence of Indians working in the Kingdom from the 1970s on. That meant, as it still means, massive remittances to India — presently estimated to be worth about $4 billion a year. But that did not translate into imports of goods and service. The Saudi businessmen’s gaze overlooked India, focusing instead on traditional trading partners Japan, the US and Europe.
India’s economic revolution in the 1990s changed everything. Liberalization led to an explosion in business activity, productivity and quality. India had products to sell at extremely competitive prices. The result has been a surge in imports of Indian goods and services. Furniture, construction materials, cars, trucks and auto parts, medical equipment, communications equipment and medical goods started to flow in. Tata vehicles are now a regular sight on Saudi roads — and how long before the Mercedes car bought in Jeddah or Riyadh is one made at the DaimlerChrysler plant in Pune? Not long. The company aims to penetrate 25 percent of the entire Asian market.
In the five years between 1999 and 2004 Saudi imports from India rose from $724 million to over $1.1 billion. And it is growing exponentially. In 2002-03 they were up 14 percent on 2001-02 (Indian accounts run from April to the end of March). The next year, ending March 2004, saw a 19 percent rise on the previous year. By March last year, the value of Indian imports had risen a further 22 percent to $1.37 billion. The surge is set to continue. Figures for the first half of the present financial year (April-October 2005) show that India sold nearly a billion dollars worth of goods to the Kingdom. That suggests that by year-end in March, Indian exports to Saudi Arabia are on course for a staggering 47 percent rise over last year — and all these figures exclude services. In league terms, India now ranks 10th on the Saudi imports market list. On the Indian export list, Saudi Arabia is now the 13th largest market for its products.
Saudi Arabia has done well out of India as well. It is India’s booming economy and its thirst for energy, alongside that of China, that has sent oil prices rocketing and filling Saudi government coffers. Today, as the Indian economy booms (and Indian cities are like so many other booming cities elsewhere, clogged with traffic) the country is now the world’s sixth largest oil importer — and a quarter of it comes from Saudi Arabia. Oil imports are going to continue their rise. Eight weeks ago Indian Petroleum Minister Mani Shankar Aiyar predicted that demand for oil would increase by five percent in 2006. Some of that will be met by increases in local production (India produced 37.5 million tons last year) but most will have to be met by imports. But it is not just oil that India imports from the Kingdom; there are the downstream petrochemical products as well. The result is that the Kingdom now supplies nearly six percent of total Indian imports; India is the fourth largest market for Saudi goods.
Clearly India and Saudi Arabia now have an economic relationship of the highest order — and one that is going to be as important in future as that with any of the Kingdom’s three major trading partners: The EU, Japan and the US. It is certainly going to continue to see strong growth; it is estimated that in the next four years bilateral trade will double to over $7 billion.
Yet despite that, one area has lagged behind — investment, particularly Saudi investment in India. Total bilateral investment is worth a mere $720 million, of which almost two-thirds, $470 million is Indian investment in the Kingdom and just over a third, $250 million, is Saudi investment in India. Compare that to Saudi investment in the US. Despite the hype about Saudis pulling out, it is estimated that Saudi investment in the American market amounts to between $500 billion and $750 billion, primarily in the stock market and real estate.
The presence of 1.6 million Indian expatriates resident in the Kingdom is the reason why there is such greater willingness to invest than there is for Saudis in India. They are here; they know the market and the opportunities: India remains for most Saudi businessmen an unknown quantity despite a number of trade delegations in both directions in recent years. Altogether Indian investment is behind some 65 joint ventures in the Kingdom — in management and consultancy, construction, pharmaceuticals, telecommunications and IT. Licenses have been granted to Indian investors by Saudi Arabian General Investment Authority (SAGIA) for many more businesses.
But Saudi interest in India is growing — not surprising given that India has the second-fastest growing economy in the world and the largest middle class in the world, now estimated at 300 million. It is also expected that “high income” families will increase by 60 percent in the next four years to 44 million households. That means massive consumer growth. The country’s total retail market, worth $202.6 billion, is predicted to grow at a compounded 30 percent over the next five years. The fast moving consumer goods (FMCG) sector is the fourth largest in the Indian economy, worth in excess of $13.1 billion. Clearly, the opportunities are enormous — as anyone who knows India well can tell; shops in India, unlike in Saudi Arabia, simply do not have the same wide array of choice, the clothing sector excepted. But all that is changing fast — and India’s middle class is into shopping in a big way.
It is not just eight percent growth and its stability that make the Indian economy attractive; it is the availability of investment opportunities. Saudi Arabia is flush with liquidity but opportunities for investment within the Kingdom are limited. Compared to the 9,000 companies listed on the 23 Indian stock exchanges (the resolutely un-renamed Bombay Stock Exchange, or BSE, being the biggest by far), there are just 77 listed on the Saudi market. So far there are some 55 Saudi-Indian joint ventures in India, mainly in computer software, cement, steel, chemicals and industrial products and machinery, but with just $250 million invested, it is a drop in the ocean compared to Indian domestic investment.
The interest is there, however, and the king’s visit is bound to stimulate it further. To meet that, Saudi banks are already taking steps. The Arab National Bank recently created a new portfolio investment product to enable Saudi clients to invest on the Indian stock market. The presence of the State Bank of India, which has been licensed to open retail branches across the Kingdom, will further stimulate interest in the Indian economy.
To help ease investment in both directions, the two countries are due to sign an investment promotion and protection agreement during Custodian of the Two Holy Mosques King Abdullah’s ongoing visit. India also hopes that the visit will also result in an agreement by Saudi Aramco to invest in the state-owned Hindustan Petroleum Corporation’s refinery at Visakhapatnam in Andhra Pradesh.
There is a sense, however, that while Saudi investment in India will most certainly grow because of the opportunities there, on balance there will still be more Indian investment in Saudi Arabia than the other way round. The flow will continue to be more India to Saudi than Saudi to India. In particular, there is an expectation of more Indian services companies operating in the Kingdom. Many have already set up joint ventures here in fields such as consultancy, design, financial services and software development.
India and Saudi Arabia are natural economic partners. If geography were not enough to make that so, the market certainly would: India has the products and services, at highly competitive prices, that Saudi Arabia wants and Saudi Arabia has the oil and downstream petrochemical products that India wants. The large presence of Indian expatriates in the Kingdom further oils the wheels, although not yet to the extent in the United Arab Emirates, which is now India’s second largest export market after China. Nonetheless, there can be no doubt that Saudi-Indian trade will continue to boom and bilateral investment soar.
Before the decade is over, it will be very surprising if India is not in the Top 5, maybe even the Top 3, of the Kingdom’s list of trade partners.
(Michel Cousins is leader writer at Arab News.)
