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15 December 2015, Gateway House

The Gulf storm ahead

The GCC finds itself engulfed by a perfect storm – due to the oil price fall and the re-emergence of Iran on the world scene. While the GCC is forced to undertake politically challenging reforms and confront the regional challenge of Iran, there lies a great opportunity for India to strengthen their economic as well as security ties.

Director, Gateway House

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The scenic beauty of the Gulf is clouded by the security and the economic concerns of a region usually perceived by Indians as a repository of oil wealth, an importer of labour and one of the last bastions of patriarchal traditions. The 6 countries – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – came together in 1981 to form the Gulf Cooperation Council (GCC). [1]

Two Factors – the precipitous fall in the price of oil and the return of Iran into the global fold are forcing the GCC to undertake profound changes in the way they organise their security, their economies and their societies. The price of oil has fallen from a peak of $145 in 2008 to the current low of  less than $4o per barrel. The oil revenues of the States have consequently fallen significantly with the IMF predicting that their combined fiscal surplus of $600 billion of 2010 could turn into a deficit of $700 billion within the next 5 years. [2] In this context, it may be time for India to seize the moment and attract investment from the GCC and be the net security provider in the Indian Ocean region.

The price of oil is likely to continue to trend down in the near future because of weakening demand. The fall in the demand for Gulf oil is being further hardened by two long term technology trends – the rapid progress in the recovery of shale oil and gas in the U.S. and technical advances in renewables, pushing down the price of wind and solar energy. But even more importantly, Iran’s reintegration into the global economy signifies yet another major supplier on the market. Thus, the Gulf States have no option but to reduce their dependency on revenue from fossil fuels, currently as high as 80% in Saudi Arabia to 85% in Oman. [3]

Although the Gulf States have long talked about the need to diversify away from oil, there is now a sense of urgency about implementing drastic economic reforms. There are some success stories – Dubai has emerged as a shopping, real estate and financial hub and states such as Bahrain and Oman have promoted ‘desert tourism’. However, people are still used to importing their daily consumables and neither the agriculture nor the manufacturing sector has the potential to substitute imports. In addition, most economic activity still centers around oil which is state owned and operated by the ruling royal elites and it is but natural that they would be cautious about allowing the emergence of an entrepreneurial class which might challenge the present political and economic order.  Therefore privatisation of economic activities, if it happens, will be in small and slow steps.

Moreover, to promote  the development of a strong private sector, with a population less dependent on doles from the state, the GCC will have to foster a regulatory environment which encourages innovation and entrepreneurship and  skill their young population.  Up till now, modernising their education systems, especially higher education has meant the establishment of local campuses by American Ivy League universities such as the Weill Cornell Medical College in Qatar and New York University in Abu Dhabi. But modernising school education will require reconciling their conservative traditions with new ideas and more open attitudes, especially towards women.

On the expenditure side, the GCC states need to cut down the massive subsidies in housing, petrol, water, education and health services. Some states — as Kuwait and UAE — have begun to raise the price of petrol but the question arises whether they have the political will to continue on a path which aggravates disaffection among their people.

The Gulf States are not short of financial resources to tackle the problems ahead since most have established major Sovereign Wealth Funds – Abu Dhabi Investment Authority, SAMA Foreign holdings and Kuwait Investment Authority, which could provide the capital required to invest in skilling and educating their populations. However, this requires that these Fund progress from investing in safe and low-risk financial assets and real estate in the West, to broadening their investment portfolios to both invest inwards and look at new horizons that provide higher returns. That will likely require revising the mandates the funds have given themselves, on the advice of western investment banks, which manage their money, and nudge it towards western destinations.

This provides a great opportunity for India, which has been wooing foreign direct investment. Following the visit of Prime Minister Narendra Modi to the UAE in August 2015, the relationship received a fresh impetus, with promises of investments approaching $75 billion. [4] The ties between India and the Gulf are of mutual dependence – India imports 60% of its fuel requirements from the Gulf and 7 million Indians work in the region — while for the GCC states India is a vibrant growing $2.3 trillion economy, the fourth largest importer of oil, and located in the vicinity of the Gulf.

But the co-operation need not be purely economic. Iran’s relationship with the U.S. is becoming less antagonistic following the UN brokered nuclear agreement. This is making the Arab states nervous about the sanctity of security assurances from the U.S. Although Arab states have traditionally looked to the West for security, this could mark a turning point in diversifying their security relationships.  India is already a net security provider in the Indian Ocean and could seize this moment to forge both, a stronger economic and security relationship, if it can maintain the fine balance between its crucial relationship with the GCC and the effort to rejuvenate the historical relationship with Iran.

Disclosure: Neelam Deo was in Bahrain on the 28-29 November 2015, at the invitation of  the International Institute for Strategic Studies to participate in the ‘Bahrain Bay Forum’  which assessed business opportunity and political risk in the region, against the setting of global economic and geopolitical developments.

Neelam Deo is Co-founder and Director, Gateway House: Indian Council on Global Relations; She has been the Indian Ambassador to Denmark and Ivory Coast; and former Consul General in New York.

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[1] Ministry of External Affairs, Briefs on India’s Multilateral Relations, Gulf Cooperation Council, <>

[2] Foreign Affairs, The Gulf Economies’ Coming Meltdown?, 5 November 2015, <>

[3] Heritage Foundation, 2015 Index of Economic Freedom,  <>,

Central Bank of Oman,  Annual report 2014,  June 2015, <>

[4] Ministry of External Affairs, Government of India, Joint Statement between the United Arab Emirates and the Republic of India, 17 August 2015 <>