Photo: President of India/Facebook
Published in Scroll.in. 17 October 2015
A "historic political milestone" is how President Reuven Rivlin of Israel described Pranab Mukherjee's just concluded visit, the first by an Indian President to Israel and Palestine.
Prime Minister Narendra Modi is expected to visit Israel in 2016. India and Israel have never been closer, and the cooperation between them never quite as visible.
Advocates of India-Israel partnership on economic grounds cite burgeoning trade, investment and business ties as reasons for this close relationship. Israel’s considerable defence supplies to India are also considered an important component in the relationship.
However, the trade figures tell us another story, leading to the question: Does Israel need India more in this relationship?
History of economic cooperation
India recognised Israel in September 1950 and full diplomatic relations were established in 1992. PR Kumaraswamy notes in India’s Israel Policy:
“Indo-Arab trade was growing, but India’s bilateral trade with Israel was meagre and negligible. In 1960, the government informed the Lok Sabha that the size of the Israeli market was small and thus offered little incentive for Indian exports.”
At the time of assassination of Prime Minister Indira Gandhi in 1984, Indo-Israel relations were at rock bottom, but under Rajiv Gandhi they started improving. Bilateral trade showed improvement, and was dominated by trade in diamonds, controlled by a group of Indian diamond merchants based in the Tel Aviv suburb of Ramat Gan, who had started operating in the late 1970s. Though trade has diversified, diamonds continue to dominate.
Kumaraswamy writes that from 1996-2006, the diamond trade ranged between 52%-71% of total trade.
In 2014, diamonds still constituted 53.5% of bilateral trade. Bilateral trade which was $200 million in 1992 passed the billion mark before the end of the decade. By the end of the 1990s, Israel had emerged as India’s fourth-largest trading partner in the wider Middle East.
In 2014, bilateral trade had reached $4.52 billion, excluding defence.
Not a major trading partner
Despite the expansion in trade, Israel does not figure among India’s top trading allies, not even among the top 10. According to EXIM bank figures, India’s top bilateral trade partner is China with a trade partnership amounting to $72.4 billion for the financial year 2015, followed by the United States and United Arab Emirates. India's trade partnership with Saudi Arabia is to the tune of $39.4 billion. Even with Iran, a major Israeli rival, India has an annual bilateral trade of over $14 billion.
In comparison, the India-Israel bilateral trade is under $5 billion. As for Israel, India is Israel’s tenth-largest trade partner and third-largest partner in Asia after China and Hong Kong.
The defence partnership
The real business between India and Israel is its defence partnership, and from which Israel has been earning nearly $1 billion annually and is currently valued at $10 billion over the past decade.
Interestingly, according to the Stockholm International Peace Research Institute Israel was among the top 10 global exporters of arms between 2010-14. India emerged as the top arms importer in the same period.
Exports are crucial for Israel's defence economy. Ajai Shukla, Strategic Affairs Editor of the Business Standard, explains the economics:
“The Israeli Defence Forces are largely equipped with American equipment which comes in the form of US aid. That means Israeli defence forces buy relatively small amounts of equipment from Israeli defence companies, which must, therefore, rely on sales to foreign markets. India, the world's biggest arms importer, has become a major buyer of Israeli defence equipment.
Israel is more willing than most other arms producers to transfer defence technology to India. India enjoys leverage with Israel, since a significant amount of Israeli defence research is funded through Indian purchases of Israeli arms. Much of the R&D of Elta Systems (an Israeli defence electronics company) for instance is supported by the proceeds of sales to India, not by Israeli tax payers.”
Shukla points out that much of this support that India provides to Israeli firms could have been spent by the Ministry of Defence to support Indian defence research and development, but this has not been the practice. However, he points out that both sides have benefited:
“Active defence cooperation between India and Israel began during the Kargil war in 1999, when India urgently required defence equipment and ammunition, which Israel promptly supplied, no questions asked.”
State of Israeli economy
The recently released UNCTAD World Investment 2015 report showed that Foreign Direct Investment in Israel dropped by 46%. Inward FDI in Israel in the year 2014 was $6,432 million as against $11,804 million in 2013. The decline, according to one of the authors of the report, was primarily because of the Israel Defence Forces Operation Edge of 2014 and international boycotts against the country for alleged violations of international law.
Israel is facing tough trade negotiations with European Union, its largest trading partner, over the labelling of products made in Israeli settlements in the occupied territories. In order to reduce its dependence on the EU, it is actively tapping markets in Latin America and Asia. In fact, India, China, and Brazil are "focus" markets for increased trade.
Even with regard to Israeli FDI in India, it is not a major source. During April 2000-October 2012, Israel ranked 43rd among foreign direct investors in India with with an investment of of $55.32 million in India.
Though there is an India-Israel free trade agreement in the pipeline, which aims to significantly boost bilateral trade, and Israel is rendering assistance in a range of areas such as agriculture, irrigation, water, technology, education and Information Technology, it appears that Israel has a much greater need for India as an ally, in a world where it faces isolation on account of its occupation and severely discriminatory policies towards Palestine.
India under Modi is obliging, despite a history of active and vocal support for Palestine.