New era for trade ties between Saudi Arabia and India

23 March 2010

Both Riyadh and New Delhi stand to gain from moving beyond the current energy relationship into a sweeping trade and diplomatic partnership

Arriving in Saudi Arabia last month, Indian Prime Minister Manmohan Singh was greeted by Saudi Arabia’s Crown Prince Sultan bin Abdulaziz, flanked by his entire cabinet at the royal terminal of Riyadh’s King Khalid International airport. In a departure from normal Riyadh protocol, a red carpet was rolled out for the prime minister and the 40-kilometre route from the airport to the city centre was lined with Indian and Saudi Arabian flags.

India's imports from Saudi Arabia

India's exports to Saudi Arabia

The trip itself was a major coup for Singh. Only two previous Indian prime ministers have visited the kingdom. The last such visit was in 1982. Singh addressed the Riyadh Chamber of Commerce as well as the Majlis-e-Shoura, the king’s advisory council, ‘a singular honour’, according to Riyadh diplomatic sources.

India’s potential as an economic partner for Saudi Arabia will be enormous, if the two are seriously engaged

“Protocol is very important at these meetings and the Saudis made a lot of effort. But there is substance behind it, as the common interests are there,” says Jean-Francois Seznec, a visiting professor at the Georgetown University in the US.

Just five months into his reign, King Abdullah bin Abdulaziz visited India in January 2006, the first by a Saudi monarch in 51 years. Long overdue, Singh’s visit was a reciprocal gesture from New Delhi.

Trade flows

Saudi Arabia ranks fourth after China, the US and the UAE as India’s most important trading partners, according to India’s Commerce & Industry Ministry. Indian exports to Saudi Arabia in 2008 stood at SR18bn ($4.8bn), a six-fold rise from 2000, accounting for some 12.4 per cent of the kingdom’s total imports.

Although volumes have risen sharply, Saudi exports to India dominate the trade flows. Crude oil and petrochemicals flow to India and they are passed on the water by spices bound for Saudi Arabia and the kingdom’s 1.6 million Indian expatriate workers.

But as with most of Riyadh’s foreign relations, it is oil that lies at the heart of the matter. According to Dubai-based Gulf Research Centre, India is the fourth largest importer of Saudi oil after China, the US and Japan.

India’s oil consumption has risen by 27 per cent in the past 10 years, from 2.2 million barrels a day (b/d) in 2000, according to the
UK oil major BP. Finding reliable sources of foreign oil has therefore become critical for the Indian economy.

In numbers
Indian exports to Saudi Arabia in 2008SR18bn
The rise in India’s oil consumption over the past 10 years27per cent
The value of the Saudi Aramco contract won by Punj Lloyd$300m
Sources: India’s Commerce & Industry Ministry; BP; MEED

Energy cooperation

As with its rival and neighbour China, India’s interest in securing energy resources is a crucial factor in the current focus on enhancing ties with Saudi Arabia and the wider Gulf region. As part of this, India is seeking to move beyond the traditional producer-consumer relationship it has with the kingdom. Addressing the Riyadh Chamber of Commerce, Singh is reported to have described conditions as ‘ripe’ for a comprehensive energy partnership, with Indian companies participating in upstream and downstream oil and gas projects in the Gulf state.

In 2009, Indian contractor Punj Lloyd was awarded a $300m contract for the tank farm package at state oil firm Saudi Aramco’s planned 400,000 b/d refinery at Jubail Industrial City. The company is also bidding for the $900m deal to build storage tanks at the 400,000 b/d refinery at Yanbu on the Red Sea coast, which is expected to be awarded in June 2010.

Any discussion about Saudi-Indian relations is incomplete without mention of neighbouring Pakistan. Manmohan’s trip has upset many in Pakistan, who view their relationship with the kingdom almost as a bond between brothers, which goes beyond a shared faith.

While only three Indian premiers have visited Riyadh since India gained independence in 1947, every Pakistani head of state makes a visit to the country’s key allies, China and Saudi Arabia, after taking up office.

“Pakistan is probably uneasy about the deal. But, a couple of days after Singh’s visit there was a visit from a Pakistani minister,” says Seznec.

New Delhi has consistently refuted suggestions that China could help smooth out India’s troubled relations with Pakistan. However, it appears more willing to accept some form of Saudi mediation to improve India-Pakistan relations. “Saudi Arabia could play an arbitration role. They are more independent than the US in many ways as an interlocutor,” says Seznec.

Remarks by Shashi Tharoor, a junior minister accompanying Singh in Riyadh, that Saudi Arabia’s long and close relationship with Pakistan makes it a ‘valuable interlocutor’, has been widely seen as a call for Saudi intervention. New Delhi has consistently rejected any call for third-party involvement in Kashmir.

The request would have pleased many in Pakistan, but Tharoor has had a tough time explaining his comments to the Indian political opposition and press on his return.

Saudi Arabia appears willing to take on the role, particularly with regards to tackling terrorism. Following the meeting, the Saudi Foreign Affairs Minister Prince Saud al-Faisal said: “Pakistan is a friendly country. Anytime one sees a dangerous trend in a friendly country, one is not only sorry but worried.”

However, Al-Faisal did not mention the need for India and Pakistan to resolve the issue that lies at the core of their dispute – Kashmir – and that would have worried Islamabad.

Strained interaction

The diplomatic relationship between India and Saudi Arabia has been complicated and often strained. India maintained a protracted silence over the decade-long Soviet occupation of Afghanistan.

The establishment of diplomatic ties with Tel Aviv following the Oslo Accords between Israel and Palestine in 1992, further complicated the situation. India’s purchases of Israeli weapons also made ties difficult.

However, India’s record in voting against Iran on its nuclear enrichment programme, is of strategic interest to Riyadh.

With the prospect of a US civilian nuclear power deal in the balance, India voted against Iran at the Vienna headquartered-International Atomic Energy Agency (IAEA) in 2005. And in 2009, it supported an IAEA resolution condemning Iran for its decision to build a second uranium enrichment plant near Qom, around 160km southwest of Tehran. The resolution, passed on 27 November 2009 with 25 votes to 3, urged Iran to halt activity at the plant and to clarify its purpose.

The move prompted Iran to renege on some of its crude supply agreements with India, and has naturally drawn India closer to Iran’s regional counter weight, Saudi Arabia.

“The Saudis want them [India] to turn away from Iran. Obviously they have to keep this quiet as they do not want to agitate the Iranians,” says Seznec.

India’s Reliance Industries began production at its 580,000 b/d refinery at Jamnagar city in the western state of Gujarat in December 2008. However, the company is reported to have cut off gasoline supplies to Iran in June 2009, despite continuing to import crude oil from the Islamic republic.

After years of talks, India has finally opted out of the Iran-Pakistan-India gas pipeline project, a proposed 2,775-km pipeline, which would deliver natural gas from Iran to Pakistan and India. In September 2009, state-controlled Mehr news agency reported India had quit the project, although Iranian officials say a decision had not yet been made.

Pakistan, however, signed an agreement with Iran on 16 March, for the $7.6bn project connecting Iran’s South Pars gas field with Pakistan’s southern Balochistan and Sindh provinces.

Security partnership

India’s trade and energy security is inextricably linked to the security of the Straits of Hormuz. Regular exercises with Gulf navies have extended the country’s reach and helped it forge better security ties in the region. On the other side of the Arabian peninsula in the Gulf of Aden, Indian naval patrols have tackled Somali pirates. An improving relationship with the US will also shape India’s relations with the Gulf. Given India’s growing importance as a consumer market, Saudi Arabia and the GCC will want to expand ties.

But there is still a lot of work to be done to move beyond the 55 years of strained relations. Confidence building initiatives, such as naval exercises and contract awards, will go far in helping reduce tensions. India’s potential as an economic partner for Saudi Arabia will be enormous, if the two governments are seriously engaged. The Indian prime minister’s reception in February shows Riyadh wants to take ties to the next level. Singh’s comments that he was humbled and honoured by the visit suggest New Delhi wishes the same.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications