India seeks review of UAE trade deal amid spike in silver, gold imports

India is reviewing its trade deal with the UAE as a surge in silver and gold imports raises concerns over tariff concessions, value addition norms, and govt procurement commitments under the CEPA

After walking out of the Regional Comprehensive Economic Partnership (RCEP) agreement at the 11th hour of negotiations in 2019, India was seen as protectionist and averse to signing trade deals. To change this image, India signed a trade deal with the United Arab Emirates (UAE) in a record 88 days of negotiations in February 2022, which came into force in May that year.

However, just over two years later, India is seeking a review of some components of the Comprehensive Economic Partnership Agreement (CEPA) with the UAE.

Last month, commerce secretary Sunil Barthwal said that India wants to assess certain provisions of the India-UAE CEPA. The review will include addressing New Delhi’s concerns regarding value addition norms amid a sharp spike in imports of precious metals, particularly silver.

Beyond the surge in imports of precious metals, India’s first-ever commitment to government procurement in the trade deal with the UAE and duty concessions on items such as petrochemicals have put New Delhi in a difficult position while negotiating trade deals with other countries.

These issues raise the question of whether India made a mistake by finalising the CEPA rather hastily in an 'unprecedented' 88 days.

FTA-led spike in silver and gold imports

The size of India-UAE trade is significant, with the West Asian nation being India’s third-largest trade partner. The value of bilateral trade stood at $22.8 billion during the financial year 2023-24. The UAE is also India’s second-largest export destination and third-largest import partner.

However, what came as a surprise was the way silver imports from the UAE surged. Even though overall imports from the UAE contracted by 9.8 per cent to $48 billion in FY24, silver imports saw a 5,853 per cent rise to $1.74 billion from $29 million a year earlier. The rise was primarily due to the tariff concessions on precious metals agreed upon under the trade agreement.

Similarly, gold jewellery imports increased by 290 per cent to $1.35 billion in FY24 compared to the same period a year earlier. Imports of gold bars also rose, though to a lesser extent, due to caps on the volume of imports of both product categories.

Government officials said that in the case of silver, the trade is unusual because the UAE does not produce silver but imports large silver bars, melts, and converts them into silver grains.

Over the last four to five months, the commerce department has tried to understand the reasons behind the surge, despite the stringent rules of origin and value addition norms agreed upon under the trade deal. Indian government officials believe it is difficult to achieve a three per cent value addition just by melting bars and converting them into grains.

As a result, since the UAE's designated authorities issue certificates allowing importers to benefit from concessional duties, silver imports have continued.

“We will ask UAE officials how they explain their rules of origin when exporting these items,” a senior government official told *Business Standard*.

Under the trade agreement, India has committed to gradually taper duty to zero per cent within the next eight years. The import duty on silver currently stands at 8 per cent under the CEPA.

In the case of gold jewellery and bars, a tariff rate quota (TRQ), along with concessional duty, is in place. The TRQ was imposed to prevent a sudden surge in the quantity of imports, as gold is a high-value commodity.

Experts said it is important to note that the UAE is primarily in the business of re-export, not production, and is not a manufacturing hub. Furthermore, the India-UAE CEPA is more strategic in nature, with limited economic benefits.

Biswajit Dhar, distinguished professor at the Council for Social Development, said India should have exercised caution, as similar problems related to circumvention had occurred with the trade deal with the 10-member Association of Southeast Asian Nations (ASEAN), particularly with Singapore.

“These issues are bound to arise, as third countries will try to use the UAE to route their products to India. The fact that we have an agreement with the UAE and zero duty imports puts a lot of pressure. We saw similar dynamics with the ASEAN trade deal, with the government trying to address rules of origin issues,” Dhar said.

To address the surge in imports, the Union Budget in July slashed import duties on gold and silver from 15 per cent to 6 per cent. According to the Delhi-based think tank Global Trade Research Initiative (GTRI), this will offer temporary relief, as tariffs on gold and silver from Dubai will drop to zero in the coming years, leading to another rise in imports.

“The government saw renegotiating the CEPA to revoke these tariff concessions as the only viable option. Reducing most favoured nation (MFN) tariffs on gold and silver to zero was ruled out as it would lead to high imports and a drain on forex,” the GTRI report said.

An industry official noted that the growth in silver imports from the UAE has been exponential, and it is uncertain how this will develop further.

Other issues 

Under the trade agreement with the UAE, India opened up its central government procurement market for the first time, granting UAE companies national treatment status, on par with Indian companies, for bidding on central government tenders, though in limited sectors.

This was seen as a significant shift in India’s trade policy stance, considering that India is not a signatory to the World Trade Organisation’s (WTO) government procurement agreement.

According to Dhar, this move indicated a lack of consistency, as India has been opposing the plurilateral agreement at the WTO. Moreover, India will have to negotiate firmly on free trade agreements (FTAs) with other developed countries, such as Australia, the United Kingdom (UK), and the European Union, as government procurement chapters are non-negotiable for these nations.

Dhar also pointed out that while the India-Japan FTA does not include a chapter on government procurement, there is a clause stating that if India opens its public procurement market to any trading partner, it must extend the same to Japan.

Industry officials believe that duty concessions on petrochemicals, though calibrated, have set a precedent, with Oman now pressuring India for similar cuts.

“India should not have agreed to duty cuts on petrochemicals under the India-UAE CEPA. If the same deal is given to Oman, other Gulf nations, such as Qatar and Saudi Arabia, may also demand similar concessions,” another industry official said on condition of anonymity.

Pradeep Mehta, Secretary General of CUTS International, said India should avoid drastic action. “A review of the agreement in the near term is unlikely. For now, India can raise any concerns in the CEPA Joint Committee or the Subcommittee on Rules of Origin, which provide platforms for consultation and cooperation,” Mehta said.

However, the GTRI report suggested India should push to withdraw tariff cuts on platinum, silver, diamonds, and gold jewellery; adjust value addition rules; ban the conversion of expensive silver bars to cheaper silver granules to exploit CEPA benefits; stop imports of sanctioned metals from Russia via Dubai; and revoke special privileges to the Gift City bullion exchange due to misuse.

It will be crucial to observe how the two strategic partners navigate these mutual sensitivities.