Why in news:
Indian Prime Minister Narendra Modi visited the UAE to meet with UAE President Sheikh Mohamed bin Zayed Al Nahyan and discuss bilateral relations. The focus areas of the visit were energy, food security, and defence.

India – UAE Bilateral Relations  
After a 34-year hiatus, the relationship between India and the United Arab Emirates was given a significant boost by Narendra Modi's visit in 2015. After that, there were multiple visits to the UAE by prime ministers. In 2017, Sheikh Mohammed bin Zayed Al Nahyan, president of the United Arab Emirates, was the principal guest at the Republic Day parade in New Delhi. In 2019, Prime Minister Modi was awarded the UAE's highest civilian honour, the Order of Zayed. All of this elevated the relationship and infused new vitality into the bilateral connections between India and the UAE.
The two nations have enjoyed cultural, religious and economic ties for a long      time. However, official diplomatic relations were established in 1972. 
The UAE established its embassy in New Delhi in 1972 and India set up its      embassy in Abu Dhabi (the capital of UAE) in 1973.
Since then, both nations have tried to extend their relationship deeper.
 
Aspects of India – UAE Relations
The different aspects or pillars of the bilateral relationship between India and the UAE are discussed in this section.

Strategic/Political/Security Relations  
Iran’s threats to close the Strait of Hormuz due to its conflict with Saudi Arabia are worrying for the UAE also.
Earlier, Pakistan was a partner of the UAE and had deep security cooperation with      it. However, of late, Pakistan does not seem to be of much help to the UAE; it could not come to the aid of Saudi Arabia in its fight against the Iran-backed Houthi rebels in Yemen. Pakistan has also been unable to control the separatists operating from its soil across West Asia.
There has been rising congruence between India and the UAE on terror-related      issues.
In 2003, an MoU was signed between India and the UAE on Defence Cooperation.      A Joint Defence Cooperation Committee (JDCC) was also set up.
The UAE and Israel have agreed to normalise their relations. This opens up the      possibility of India, Israel and the UAE working together to counter terrorism and security-related concerns.
 
Economic Relations
Trade can be called the backbone of the bilateral relations between both      countries.
Until the discovery of oil in that region, trade was dominated by traditional      items such as pearls, fish, dates, etc.
Export from India also increased gradually since the UAE was unified as one      entity in 1971.
Currently, the UAE is India’s third-largest trading partner. It is also the second      largest export destination for India, second only to the United States.
India is the Emirates’ second-largest trading partner.
The UAE’s foreign direct investment (FDI) in India has increased over the past few years and has surpassed $12 billion. 
Abu Dhabi has invested over $6 billion in big-ticket investments in the Jio      platform, Adani, Tata Motors and Tata Power.
A comprehensive free trade agreement has been in effect between India and      the UAE since 2022. A variety of items from both nations are granted duty-free access to the markets of the other under the agreement, in addition to loosened regulations to encourage investment. 
The Comprehensive Economic Partnership Agreement (CEPA) signed in 2022 between India and the UAE is one of the key drivers of the rise in FDI from the      UAE.
Energy cooperation is one of the biggest areas of cooperation between both      countries. It is one of the top five largest suppliers of crude oil to India.
Additionally, the UAE has promised to collaborate with India on renewable energy      projects.
The UAE has also entered into an agreement with Karnataka for the strategic      storage of crude oil in Padur and Mangalore.

Diaspora   
There is a huge Indian diaspora in the UAE engaged in various activities.
The number of Indian nationals in the country is estimated to be 3.5 million as of 2021.
This constitutes roughly 30% of the UAE’s total population.
The UAE is an important destination for job seekers (both blue and white-collar workers) from India.

How India and UAE are planning to promote use of local currencies for cross-border transactions:  
India and the United Arab Emirates (UAE) have signed a pact to establish a framework to promote the use of the rupee and UAE Dirham (AED) for cross-border transactions.
The MoU on establishing a framework for the use of local currencies for transactions between India and the UAE, aims to put in place a Local Currency Settlement System to promote the use of INR (Indian rupee) and AED (UAE Dirham) bilaterally.The MoU covers all current account transactions and permitted capital account transactions.

The mechanism  
The framework for the use of local currencies for transactions between India and the UAE aims to put in place a Local Currency Settlement System (LCSS). The creation of the LCSS would enable exporters and importers to invoice and pay in their respective domestic currencies, which in turn would enable the development of an INR-AED foreign exchange market, according to the RBI. This arrangement would also promote investments and remittances between the two countries. The use of local currencies would optimise transaction costs and settlement time for transactions, including for remittances from Indians residing in UAE.

Impact of the move  
Bilateral trade between India and the UAE was around $85 billion in FY23. Government officials indicated that New Delhi is looking to work out a way to hedge exchange rate risks in the rupee-based trade to limit losses for Indian exporters.
The move to ink the pact with the UAE is part of a concerted policy effort by India to internationalise the rupee to bring down the dollar demand as a means to insulate the domestic economy from global shocks. Government officials had earlier indicated that apart from Russia, countries in Africa, the Gulf region, Sri Lanka and Bangladesh had also expressed interest in trading in rupee terms.
The RBI’s plan to settle international trade in the local currency will let importers make payments in the rupee, which will be credited to the special account of the correspondent bank of the partner country, while exporters will be paid from the balances in the designated special account. The Central bank is also in the process of issuing a Standard Operating Procedure to all banks so that e-BRC (electronic bank realisation certificate) becomes easy to use.

Comprehensive Economic Partnership Agreement (CEPA):  
It is a kind of free trade pact which covers negotiation on the trade in services and investment, and other areas of economic partnership.

Why does the FTA with UAE matter?  
• Increase trade: With the conclusion of the CEPA, India and UAE aim to increase bilateral goods trade over the next five years to $100 billion.
• Employment opportunities in UAE: It also obliges the UAE to offer 1.4 million work visas for highly skilled professionals from India.
• Zero duty exports: Around 90% of products exported from India to UAE will attract zero duty with implementation of the Agreement.
• Value addition: It also has stringent 'rules of origin' reflecting requirements for substantial processing of up to 40% value addition.
• Market accessibility: Through the pact, Indian exporters will also get access to the much larger Arab and African markets.
• Promote Indian exports: CEPA is likely to benefit about $26 billion worth of Indian products that are currently subjected to 5% import duty by the UAE, India’s third-biggest trading partner behind the US and China.
 
Some of the issues in the relationship between both countries are: 
There are some commercial challenges that Indian companies face in the Emirates concerning unclear regulations, labour laws and transparency issues by Emirati businesses.
The UAE and Iran have territorial disputes between them. Any flare-up in this will affect India’s trade, the Indian community and energy security.
The UAE is home to a large number of Indians, among them blue-collared workers and manual labourers as well. They face many issues such as terrible working and living conditions, and discrimination in treatment vis-a-vis other workers.
 
Way Forward 
• Improving the investment climate in India: India has a huge market and there is a significant scope for growth in automobile industry, services sector, agriculture and allied industries. If business regulations are eased and the time spent on getting clearances can be reduced, it can lead to major investments from UAE.
• Enhancing defence engagement: There is a need to further enhance cooperation through joint training programs for Indian and UAE officers. Increasing the number of Emirati officers who can avail training in its defence schools will lead to greater familiarization within the defence establishment.
• Promoting medical tourism: India’s private hospitals have the necessary infrastructure, facilities and expertise to provide world class medical care within a fraction of the cost spent in developed countries. Hence, it can be an important area where India can attract Emiratis.
• Renewable energy: The cost for production and transmission of solar energy in the UAE are a fraction to that of India and this is a priority area for the UAE government. Indian companies with expertise in this area can invest in the renewable energy sector in UAE.
• Education sector: India has some of the finest higher education institutions in engineering and management fields and given their cost-effective and world-class education, they can be a major attraction for UAE students looking for acquiring higher education and better skills.  
• Enhancing people to people contacts: There is a need for enhancing the people-to-people contacts for familiarization and increasing interactions between think tanks, researchers and through academic exchanges.

Mains Practice question:
Q. Briefly analyze the provisions of India – UAE Comprehensive Economic Partnership Agreement (CEPA).