The 'Desert Rose'

With the sheer power it wields in its grasp to influence global oil prices, any economy can choose to ignore Saudi Arabia only at its own peril. However, the emerging realities have prompted the Saudi government to move beyond being a predominantly oil-dependent nation to a more open, broad-based market economy. And therein lie tremendous trade opportunities for India.

As a home to the sacred cities of Mecca and Medina (visited by millions of Muslims every year), the religious significance of Saudi Arabia doesn’t require any introduction to the world. And the fact that this country accounts for over 25% of the world’s proven oil reserves, exemplifies its significance to the global economy as well. This becomes even more relevant considering how concerns about energy security are widespread. However, this enviable position does not come without its pitfalls, as Saudi Arabia also faces threats of terrorist attacks on its oil installations. Moreover, the country has, in the late ’90s, borne the brunt of declining oil prices while it also faces competition from a resurgent Russia, whose oil production is on the rise. These factors necessitate steps towards reducing heavy economic dependence on oil. Hence, the time is ripe to explore Saudi Arabia for mutually beneficial trade relations.

Big as its Ruler

When Muhammad Ibnu Bdi l-Wahhab (an Arab religious leader) successfully consolidated an otherwise disintegrated country in 1744 to give birth to Saudi Arabia, little would he have known that he was building a nation that’s almost floating on the elixir of power – oil. Since inception, there were a series of raids and attacks by rulers of the Ottoman Empire and other contenders from the Arab world to conquer the trade route between Arabian nations and the rest of the world. It was only in 1902 that late Sultan Abdul Aziz Al-Saud (better known as Ibn Saud) won back Riyadh from his rival family and ended the struggle for power over the country. The West accepted Saudi Arabia as an independent state only when it signed the Treaty of Jedda on May 20, 1927. Ibn Saud’s dynasty continues to rule till date through current Saudi monarch King Abdullah bin Abdul Aziz Al-Saud, who is a staunch supporter of the West. While the political fate was decided in 1927, it took three more years before the economic destiny of the country was completely transformed; with discovery of its oil reserves. Since then, the economic ascent of Saudi Arabia has made history. Also historical have been its strong ties with the United States, although, though relations were strained for a while when fifteen of the nineteen hijackers of 9/11 were found to be of Saudi Arabian origin.

Amazing ‘Oil’onomics

Saudi Arabia provides for the largest free market economy in the entire Middle East, largely fuelled by its huge crude oil and natural gas reserves. The country is estimated to have 261 billion barrels of crude oil reserves that would last for another 85 years. This amounts to nearly one-third of the total oil reserves found across the world till date. Not surprisingly, the Saudi Arabian economy is largely oil-driven. Around 90% of its exports and nearly 75% of all government revenues come from the sale and usage of oil. Oil has done wonders for the GDP as well as for per capita income. In 2005, the per capita income stood at $12,800 per annum while the GDP registered a healthy growth rate of 6.1%. The revenues earned out of oil are now being spent to develop its agriculture and industrial sectors including iron & steel, construction materials, food processing, engineering, chemicals and metal fabrication. In terms of exports, the basket is being dominated by petroleum and other hydrocarbons. Exports in 2005-06 were $19.01 billion. US, China, South Korea and Japan were the major trading partners.

On the other hand, machinery & equipment, processed food, chemicals, motor vehicles and textiles are amongst the major import items for Saudi Arabia; US, Germany, Japan and China being the major suppliers. Total imports for 2005-06 were $59.42 billion. With the government allowing 100% FDI within the country and joining the WTO, Saudi Arabia has seen a boost in inflows of foreign direct investment, although, the figures were still miniscule at $1.89 billion in the year 2004 (latest UNCTAD report). Barring the evergreen oil industry, machinery & equipments, processed food, chemicals, motor vehicles and textiles have also been able to attract most of the investment by showing promising growth potential. Investments from global majors like Sumitomo Chemicals, Royal Dutch Shell and Acetex, certainly show a bright industrial future for the country. Saudi companies are also showing more interest in the services and retail sectors. Though these sectors are at a nascent stage, they are getting prepared to attract higher foreign participation soon.

Indo-Saudi Relations

The bilateral relationship between India and Saudi Arabia has grown to become stronger and better over the years. While Saudi Arabia is an excellent partner in both trade and foreign policy from the Arab world, India has also contributed significantly to the economic and industrial growth of the Saudi Arabian community. For instance, take the presence of 1.3 million Indians (Saudi Arabia’s total population of 23 million), the largest number of people from any single foreign country. India is the fourth largest market for Saudi Arabian goods, accounting for 5.95% of its global exports. Total exports to India stood at $1.16 billion in 2005-06 (April to December). Indian exports amounted $1.31 billion for 2005-06 (April to December), contributing 2.9% to the total imports of Saudi Arabia. Major items of export for India were food grains like basmati & non-basmati rice, copper, clothing & apparel and nuclear reactors, while minerals and petroleum were the major imports. The focus of economic and commercial relationships between the two countries is continuously drifting towards non-oil sectors like services, as both countries have started to view the economic capabilities of each other in a new light. This has become possible due to the rise of strategic commitments between companies of both countries. Investments, joint ventures, project and technology transfers have grown substantially over the past two decades, prompting many Indian companies to setup operations in Saudi Arabia.

Air India, New India Assurance Co., LIC International, Polaris Soft ware Lab Ltd., Wipro Ltd., Tata Consultancy Services and Larsen & Toubro are a few such companies. The policy initiative taken by the Saudi government to allow 100% FDI approval and full ownership rights to foreign companies, has boosted confidence of Indian firms. Till now, 82 Joint Ventures between Indian and Saudi companies have taken place. Major areas of interest for Indian companies are consultancy services, infrastructure projects, telecommunications, IT and pharmaceuticals. But, while Indian companies have shown immense interest in investing in Saudi Arabia, the reverse isn’t true. In the period of fifteen years from 1991 to 2006, a pitiful $19.14 million FDI has fl own into India from Saudi Arabia. Till date, no major Saudi Arabian companies have setup operations in India, either. But the scenario can be expected to change very soon. The recent talks between India and Gulf Cooperation Council (GCC, of which Saudi Arabia is a major member) are aimed at initiating a Free Trade Agreement (FTA) by the year 2007. If this agreement fructifies, it is expected to remove many significant bottlenecks between the two countries. For Indian businesses, it’s time to take their relationship with the ‘Desert Rose’ to a newer level.

Reservoirs of Lucre

What is continuously fuelling the growing economy of Saudi Arabia is the fact that in addition to its large reserves of crude oil, it is also extensively rich in mineral resources. Gold, silver, bauxite, copper, iron, lead, tin et al are found in huge quantities in the country. There are around 600 sites where gold has been found. The Saudi government has realised the importance of its position, and thus, started a ministry dedicated to mining in 1997. Thanks to this initiative, more than 400 tonnes of minerals are mined everyday, at present. Undoubtedly, this is precisely the reason behind the growing attractiveness of the region for power generation. In 2005, Saudi Arabia exported metals and minerals worth $1463.1 million. China, US and India have emerged as major importers over the years. The government is proceeding with the sale of some assets of state-owned Saudi Arabian Mining Company (Maaden) to private players to bring about a boom in the sector. Both local and foreign investment is being encouraged.