The Pulse

The Future of India-Saudi Arabia Relations

Recent Features

The Pulse

The Future of India-Saudi Arabia Relations

With complementary needs in trade and investment, New Delhi and Riyadh can take their relationship to the next level.

The Future of India-Saudi Arabia Relations
Credit: Indian Ministry of External Affairs

Prime Minister Narendra Modi’s visit to the Kingdom of Saudi Arabia was significant for its timing. The collapse of oil prices and mounting public expenditure has left many of the Gulf Arab states servicing a massive budget deficit. This is particularly true of Saudi Arabia– a country where 90 percent of the government revenue comes from the sale of oil and where public expenditure has mounted since its involvement in the Yemeni civil war. As a result, the member states of the Gulf Cooperation Council (GCC) have embarked on initiatives to diversify their economies with an avowed aim to reduce dependence on a volatile commodity – oil. A key part of the process involves investing abroad in areas where they have proven expertise and courting investments in areas where they lack the know-how.

India and Saudi Arabia need each other

Attracting foreign capital remains a key priority for the Modi-led government. Foreign investments could boost domestic growth by generating job opportunities and through the infusion of better technology and standards. Apart from enhancing the ease of doing business, India had recently relaxed the norms pertaining to FDI in many sectors – mining, construction, defense, and civil aviation among them. The Gulf states – particularly the UAE, Saudi Arabia, and Qatar – possess huge reserves of sovereign wealth, and hence are target of the Modi government’s investment push. During Modi’s visit to the UAE, investments were high on the agenda, and the Emirates agreed to constitute a $75 billion fund to invest in India’s infrastructure.

Likewise, Saudi Arabia – a country with abundant sovereign wealth ($632 billion) and a keenness to diversify its economy – could be an attractive partner in developing India’s ailing infrastructure. Apart from being a prospective investor, Saudi Arabia is already an important trade partner for India. Annual bilateral trade amounted to $39 billion in 2014-15. Saudi has a population of 31 million – roughly 50 percent more than rest of the GCC states combined – and ranks tenth in the world in terms of GDP per capita. With a large local market and a huge spending power, the desert kingdom will continue to be an important market for Indian goods – particularly precious stones, agricultural and pharmaceutical products.

For Saudi Arabia, India is a key market for its chief commodity, oil — and India’s significance in this regard is expected to grow in the decades ahead. Now that the United States – which was hitherto the largest market for Saudi oil – is on a path to become energy self-sufficient (thanks to the shale revolution), the Saudis have realized that their future markets lie to the east, in India and China with their fast growing economies. In 2015, India met 80 percent of its oil demand with imports and one-fifth of these came from Saudi Arabia – currently the largest exporter of oil and the second largest producer of the commodity.

The Indian economy is projected to rise remarkably over the next couple of decades, to become the second largest by 2040. The process will generate further demand for oil. By then, according to the Ministry of Petroleum and Natural Gas, it is expected to rise by 130 percent by 2040, from 3.8 million barrels per day to 9.8 million bpd. Needless to say, Saudi Arabia – which is already India’s largest supplier of the commodity and the only country that has spare capacity – would become a vital partner. Hence, India’s reliance on the desert kingdom will continue to rise over the next couple of decades.

Further, like the Modi government, the Saudi leadership is also engaged in an aggressive campaign to court foreign investors. FDI is viewed as an important instrument in diversifying the country’s economy. According to the Saudi General Investment Authority (SAIGA), 426 licenses were issued to Indian companies to invest in the kingdom. In the absence of actual figures, it is impossible to estimate their impact. Having said that, companies like TCS and L&T have made significant investments in Saudi Arabia and their contributions to the development of Saudi infrastructure and manpower has been duly acknowledged. Despite this, bilateral investments are not growing as quickly as either side would like.

An unconsummated relationship?

When it comes to investments, several factors explain why both countries have not fulfilled their potential. Most of the businesses in Saudi Arabia are government-owned and Riyadh has lagged behind when it comes to investing abroad. Although the kingdom has a sovereign reserve that is fourth largest in the world, it ranks 49th in terms of FDI outflow. It is irrational, in light of the current situation, to expect Saudi Arabia to soar up the ranks of foreign investors. Oil is trading at below $40 a barrel and Saudis are running a massive budget deficit. In September 2015, Financial Times reported that the country is withdrawing “tens of billions of dollars” from global asset managers to reign in on deficit.

Since courting investment was a key priority during the visit, Modi set aside time to interact with a group of business leaders in Riyadh. However, questions were raised regarding the goods and service tax (GST) and retrospective taxation. The prime minister was unable to obtain any major commitments, as the Saudi businesses remain perturbed by the unpredictable nature of India’s tax regime.

In contrast, Indian businesses have set up establishments in Saudi Arabia following the liberalization of many sectors since 2000. However, as of 2014, Indian investments there stood at a mere $269 million. In contrast, the UAE, which is one of the largest destinations for Indian investors, had bagged $1.4 billion worth of investments by then. An assessment by Santander, a financial services firm based in London, revealed that the Saudi legal framework for the settling of commercial disputes remain complex – something that has perturbed  prospective investors. Further nitaquat, a state law requiring companies to hire Saudi citizens, has added to the concern. Saudi citizens prefer government jobs that are well paid and less demanding, according to a report on National Review.

Quid pro-quo

On the investment front, Modi’s visit to the desert kingdom was not without gains. However, those who had been anticipating a headline generator would have felt betrayed. Oil prices are depressingly low and the Saudi government is carving up the kingdom’s sovereign reserves to stay alive – the time is not right for the Saudis to make large-scale commitments abroad. Nevertheless, Aramco agreed to invest in India’s energy infrastructure, although the scale and scope of the commitment remains unclear. It would be a major victory for the Modi government if the group agrees to invest in high-temperature deep sea offshore exploration, an area where India plans to expand its capabilities but lacks technical expertise. In the meantime the current government should make it a priority to address investor concerns by instituting a coherent and stable tax regime while also getting the GST bill passed at the earliest moment.

With regard to trade, although both countries concurred on the need to raise bilateral trade, no specific measures were proposed. Last year, India and UAE committed to raise bilateral trade by 70 percent to $100 billion by 2020. In marked contrast, Modi’s visit to Saudi Arabia yielded no specific targets. However, it must not be ignored that the India-UAE trade has benefited from the fact that the UAE is also a major re-export center. Substantial portions of the Indian commodities that reach the ports of UAE are re-exported to Saudi Arabia and other Gulf states. As such, it is unfair to expect India-Saudi trade to scale similar heights. However, despite that, the kingdom is the fifth largest destination for Indian exports.

In short, as one of India’s largest trading partners and the largest supplier of oil, it is in New Delhi’s interest to forge closer ties with Riyadh. As its oil consumption rates are set to increase, Riyadh will become a dependable source. Moreover, India needs foreign expertise to develop its oil infrastructure, both upstream and downstream. Saudi Aramco is the largest petroleum company in the world and is the Saudi firm responsible for the largest share of FDI outflows from the kingdom. Needless to say, collaborating with Aramco will yield tangible benefits to India’s oil sector.

Likewise, Riyadh sees an interest in molding closer ties with New Delhi. Rapid economic growth in countries like India and China – projected over the next couple of decades – will bring perceptible benefits for Saudi Arabia in the form of demand. As India’s oil consumption rate is set to reach 9.8 million bpd by 2040, the Saudis would love to cash in. Further, India has a rich portfolio in sectors like IT and pharmaceuticals, which the Saudi would find attractive as they set out to diversify their economy. In short, there are reasons to be optimistic about the long term prospects of India-Saudi relations – both countries have realized that they need each other.

Issac James Manayath is a graduate of the London School of Economics and Political Science, where he pursued MSc. in History of International Relations. He is currently a research intern focusing on India’s relations with the Gulf Cooperation Council, at the Centre for Public Policy Research (CPPR) in Kochi, India.