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Aniruddh Tripathi
Nov 16, 20228 min read

INDIA AND UK FREE TRADE AGREEMENT : AN OVERVIEW

Updated: Oct 31, 2023


As India and UK celebrate 75 years of bilateral ties, there is a renewed emphasis by leaders from both sides to enhance multifaceted cooperation between both countries. The relationship between India and the United Kingdom is guided by long historical and cultural ties, a deep respect for democracy, freedom, and individual liberty, a solid people-to-people connection, and a belief in a rule-based international order that allows cooperation for mutual prosperity. In a geopolitically tense and economically fragile world, the ascent of Rishi Sunak as Prime Minister of the United Kingdom, a practising Hindu of Indian ancestry, has raised expectations of an accelerated deepening of relationships and higher partnership ambitions on both sides. A comprehensive free trade deal between India and the United Kingdom, covering trade in goods and services, technical and non-technical barriers to trade, migration and mobility, intellectual property rights, and other issues, is high on both sides agendas.


The India-UK trade status :


India and UK enjoy a Comprehensive Strategic Partnership collaborating in a broad spectrum of sectors such as health, climate, trade, education, science and technology, and defence. India and the United Kingdom are the world's fifth and sixth-largest economies, respectively. Bilateral trade between India and UK stood at £29.6 billion in the four quarters to the end of Q2 2022, with a trade surplus in favour of India.


The chart presents a time series for trade between the UK and India for each year between 2012 and 2021. It can be observed that the total trade between the two countries has increased marginally in absolute terms over the years. Still, the trade relationship between India and the United Kingdom has underperformed its potential.


India-UK trade in Goods :

Currently, goods trade between the UK and India is governed by the Generalized System of Preferences (GSP), a WTO-compliant unilateral scheme created by the EU that grants Indian (developing economy) exporters lower tariffs than Most-Favored-Nation tariffs (MFN) when exporting to the UK. However, because of India's size among GSP beneficiaries, the EU has withdrawn preferential treatment from sectors in which India is a particularly significant exporter (e.g. chemicals, textiles, mineral products). As a result, India's competitiveness and market access have suffered compared to other competing economies. While the GSP has helped Indian exports grow over the years, its unilateral structure, limited coverage (about two-thirds of all products are GSP eligible), and the recent removal of some preferences all point to a shift away from this system and toward an FTA.


India-UK trade in services :


Services account for approximately 45% of total trade between India and the United Kingdom. Travel was the largest UK export to India in the four quarters to the end of Q2 2022. Intellectual Property and Other Business Services (including sectors such as legal, accounting and management consulting) were respectively the second and the third largest services exports in the same period. Other Business Services was also the top UK services import from India in that period.

Complementarity in demography, per capita income, tourism, specialisation in technology, finance, and digitisation, and the Fourth Industrial Revolution, among other factors, leaves enormous untapped potential in the service sector. An FTA can change that.

India is estimated to be the world’s third-largest economy by 2050. With 18% of the world's population, the economic potential of India's massive market grows as its GDP per capita rises. For Indian goods and services, the UK provides access to a highly developed, diverse, and high-net-worth market. There is a mismatch in the types of products demanded and supplied by the two markets; for example, India specialises in small and medium automobiles, whereas the UK specialises in expensive cars and electric vehicles. As a result, India and the United Kingdom have a strong trade complementarity that should be explored and utilised for mutual benefit.


The FTA Negotiations:


Boris Johnson, Prime Minister of the United Kingdom, and Narendra Modi, Prime Minister of India, announced an "enhanced trade partnership" as the first step in negotiating a

Comprehensive free trade agreement in May 2021. The 'Roadmap 2030' provides a framework for UK-India relations and sets an ambitious goal of more than doubling bilateral trade by 2030. The intention is clear: to increase government-to-government, business-to-government, business-to-business and people-to-people cooperation to maximise benefits for both countries, as well as to intensify specialisation and raise productivity within industries while building on a strong existing relationship. According to a UK House of Lords International Agreements Committee report, a Comprehensive FTA will "deepen economic and strategic ties" and benefit from lower trade costs, boosting economic activity in both countries' competitive strengths. A sentiment shared by both parties. Intense negotiations have ensued since January 2022, and the two sides have finalised 19 out of 26 chapters. Barring two contentious chapters, other issues have an overarching consensus.


During the FTA negotiations, sector-specific stakeholders and pressure groups expressed concerns. Indian exporters have had a bad experience with the FTAs over the decades, with India opting out of the giant Regional Comprehensive Economic.


What are the contentious issues?


India desires improved and easier migration of professionals and students and access to work visas for Indian students in the United Kingdom. Textile and leather industries in India seek parity and reduced tariffs in ongoing FTA negotiations with potential competitors such as Vietnam and Bangladesh. The agriculture sector in India expects the UK to implement predictable, scientific, and WTO-compliant Sanitary and Phytosanitary measures. The issue of reduced market access for Indian products in sectors such as primary and agricultural goods, pharmaceuticals, plastic products, and so on has been raised due to Technical Barriers to Trade in the form of Non-Technical Measures. In the FTA, India's cooperative dairy sector seeks protection from subsidised, cheaper foreign products. India's gems and jewellery sectors have been losing market share in the UK to low-tariff countries such as Turkey, prompting them to seek a favourable FTA agreement. New Delhi also seeks a Totalization Agreement, which would reduce the burden of social security compliance on Indian IT firms and eliminate dual social security taxation. India also wants market access to the UK legal services sector.


In the aftermath of Brexit, Britain seeks greater market access for its specialised goods and services in India, as well as to reduce its trade deficit with India. As a global financial and technology hub, London wishes to expand its presence in the emerging Indian banking and insurance markets. Because one of the FTA's goals is to maximise British investment in India, UK-based investors are demanding an Investor-State Dispute Settlement Mechanism or a viable alternative. Data protection and data localisation are also hotly debated topics on both sides. Migration and mobility issues are inextricably linked to domestic politics in the United Kingdom, necessitating difficult bargaining. One of the issues still being negotiated is the UK's desire for lower customs tariffs on Scotch Whiskey, luxury automobiles, and machinery. Other issues on the table include tighter intellectual property rights, clarity on Rules of Origin, generic medicines, corruption, labour standards, environmental protection, and non-discriminatory government procurements.


The way forward :


India and the UK must find amicable solutions to these issues and capitalise on each other's strengths. India is emerging as the world's factory, providing cheap, highly skilled labour and expertise in various sectors. The UK industries should collaborate and manufacture in India under the Production Linked Incentive (PLI) Scheme, which incentivises and provides tax breaks to foreign firms manufacturing in India. High technology collaboration and manufacturing in India, where the UK has expertise in sectors like defence, aviation, jet engines, and shipbuilding, will bring immense profits. Mutual recognition of education and university-level collaboration will enable greater movement of professionals between the two nations and curb illegal immigration. Greater market access to top-class Indian generic medicines will reduce the cost of NHS and provide relief to the citizens of the UK. Consumer tastes and preferences differ in both markets, so primary and processed food exporters in both economies can benefit from providing consumers with a variety of options. For example, most Indian milk products are based on Buffalo milk. In contrast, cow milk is widely used in UK-based milk products, increasing consumer choice while avoiding competition in each other's markets. SPS and TBT measures should not be used in place of customs tariffs. India must enact domestic legislation to protect data through the EU's General Data Protection Regulation (GDPR). The government of India's newly drafted four labour codes provide much-needed standardisation and social security and reduce red-tapism. In accordance with the vision of 'Make in India, Make for World,' India can provide leeway to the UK and eliminate customs tariffs on luxury intermediate goods, such as Scotch Whisky, manufactured and packaged in India. Agri cess should not be imposed on foreign companies manufacturing in India under certain conditions. Reciprocal access to goods like Basmati rice for alcohol can be negotiated. India must also improve its domestic capacity and take steps to meet necessary and legal technical and non-technical standards.


A Comprehensive Free Trade Agreement between India and the United Kingdom must foresee technological and environmental changes. It should use the aspects of the Fourth Industrial Revolution to achieve sustainable development. Artificial intelligence, the Internet of Things, and the fintech revolution, among other things, must be leveraged by both economies to sustain entrepreneurial zeal and bring efficiency to government and business operations. To enable this, FTA must include a liberal framework for Research & Development activities between both nations.


Europe India Centre for Business and Industry has been playing a major role in promoting trade and relations between UK and India/ EU and India and helping build a closer people-to-people bond. Over the last 11 years, EICBI and our associate organisations have organised 25 Major business summits in the European Union ( 22 summits at the British Parliament in London and three summits at the European Parliament in Brussels), whereby EICBI & its delivery partners have engaged more than 3310 delegates from 2250 companies. These summits have allowed British MPs, European Members of Parliament and Indian lawmakers to get to know each other and engage in discussions with companies planning to expand into these regions. This link provides more information regarding our summits, including a post-conference report and photo album - http://www.eicbi.org/summits. We have also engaged with more than 36 Members of Parliament from the UK Parliament, Indian Parliament and European Parliament, and you can find the list here - https://www.eicbi.org/attendees-uk-parliament-eu-parliament-indian-parliament. We have also organised numerous visits of Dignitaries to India, which have provided opportunities for British MPs and companies to understand India at the grassroots level. This link provides more information on the delegation visits - https://www.eicbi.org/delegation-visits.


A UK-India FTA could directly benefit consumers by providing low-cost, high-quality alternatives in an inflated market. It will create employment and opportunities for both nations and help stabilise an economically and geopolitically fragile world. A trade agreement with India contributes to the UK government's strategy of "tilting towards the Indo-Pacific and championing free trade." It will not only strengthen the global supply chain but also signal to the world two great democracies' intentions of peace, prosperity, and rule-based order. Emerging out of the colonial past, the relationship between India and the United Kingdom has withstood the test of time. The FTA is a necessary step in the right direction as the two countries enter 'Amritkaal' - the next 25 years, towards a century of bilateral ties.


(Aniruddh Tripathi is a research fellow at Europe India Centre for Business and Industry.)


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