The Unfinished Agenda: Significance and Challenges in Sealing the India-UK Free Trade Deal

  • The India-UK Free Trade deal, valued at £24.3 billion annually, is a great opportunity to strengthen the existing strong relationship, benefiting businesses in both countries.
  • India stands to gain access to UK technologies, advanced research facilities, London’s financial institutions, and affluent consumers.
  • The India-UK Free Trade Agreement marks a significant shift in India’s trade strategy, prioritizing closer ties with Western and African nations to decrease dependency on China.
  • For the UK, this agreement serves as a chance to recover from losses linked to Brexit and strengthen economic connections with a major partner.

External Affairs Minister S Jaishankar recently wrapped up a five-day visit to the UK from November 11-15, It coincided with Diwali celebrations, adding a festive touch to the diplomatic affairs. He characterized this visit as a timely series of cross-party engagements, showcasing substantial progress on the ongoing free trade agreement (FTA) negotiations between India and the UK.

During his media interaction, he was questioned about the upcoming 14th round of negotiations on the FTA going to be the final one. With a diplomatic finesse, Jaishankar responded, “We have made substantial progress, but I don’t think it would be prudent of me to make predictions or to put timelines. I think both sides are very aware of the importance of the FTA and will make the utmost effort to get there. So, we must take it as it happens.”

In May 2021, both prime ministers made the announcement of the India-UK Enhanced Trade Partnership [ETP] which carried a bilateral commitment towards the negotiation of a comprehensive Free Trade Agreement [FTA] with the intention to unlock the full potential of India-UK trade and commercial relationship. As per terms in January 2022 both countries began their negotiation for free trade policy with the end-of-the-year timeline for an interim pact unfortunately, FTA talks have completed 14 rounds, but both countries are yet to reach the middle ground. But why is this FTA taking its sweet time to materialize?

What is A Free Trade Agreement?

The Free Trade Agreement is a pact between two or more nations to reduce barriers to imports and exports among them. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.

It brings a multitude of benefits for participating nations. By reducing or eliminating tariffs and trade barriers, FTAs facilitate increased market access and promote economic growth. Businesses gain access to larger consumer bases, leading to expanded production, job creation, and enhanced competitiveness. Consumers benefit from a wider array of affordable goods and services. Moreover, FTAs encourage innovation and efficiency as companies strive to stay competitive in the global market. The agreements attract foreign investment, foster economic development, and contribute to diplomatic ties by establishing a foundation for international cooperation. In essence, FTAs create a framework for mutually beneficial trade relationships, stimulating economic activity, and promoting prosperity on a global scale.

Trade relationship between India and the UK

The India and UK economic relations received a vibrant upward direction after the establishment of the Joint Economic and Trade Committee (JETCO) in 2005 to tackle trade and investment barriers on both sides and promote the business links. The trade between India and the UK has more than doubled between 2005 to 2023 by the end of FY 2022-23 India has been the twelfth largest trading partner accounting for a total of 2% of the UK’s total trade.

In terms of goods, India has been the UK’s thirteenth largest trading partner and for services it is the tenth largest. In 2022-23, alone India and UK bilateral trade had increased 16% to 20.36 billion dollars. Over 90 per cent of India’s exports to the UK consist of clothing, medicinal and pharmaceutical products, metal manufactures, organic chemicals, and precious stones. India is among the top two source markets for FDI to the UK. Indian companies play a significant role in the UK’s economy by creating jobs and contributing to taxes. Even though uncertainty over Brexit, the number of Indian firms operating in the UK increased from 800 in FY 2017-18 to 850 during FY 2019-20, employing over 1,10,793 people according to a Deloitte report. The UK is the largest European source of remittance to India.

If the UK and India sign a free trade agreement, India's trade could significantly increase from £23.3 billion with an Enhanced Trade Deal to £50 billion.

The number of UK companies operating in India has risen to 635 with a turnover of £51 billion in 2023 from 618 firms with a turnover of £36 billion in 2022. These companies are incorporated in India and are owned or controlled directly or indirectly by the UK. Nearly 6.67 lakh jobs were generated in 2023 compared to 4.66 lakh in 2022 by these firms. Technology is the most dominant sector for these firms in 2023 as against business services last year.

Significance of the Proposed India-UK FTA

If the UK and India sign a free trade agreement, India’s trade could significantly increase from £23.3 billion with an Enhanced Trade Deal to £50 billion. As India is on track to become the world’s third-largest economy by 2050, it will become the UK’s top partner. This trade deal, valued at £24.3 billion annually, is a great opportunity to strengthen their existing strong relationship, benefiting businesses in both countries. India stands to gain access to UK technologies, advanced research facilities, London’s financial institutions, and affluent consumers.

A deal between the UK and India could make it simpler and cheaper for British businesses by removing or lowering high tariffs on UK exports. Of the £5.4 billion worth of goods the UK sells to India each year, £5.2 billion have tariffs, averaging about 19%, and even higher for some products. This agreement would also benefit the UK, which is good at exporting services, by giving it better access to India’s growing services sector, making up 54% of its economy. Both countries aim to strengthen their investment ties, which currently support around half a million jobs.

Why are the Negotiations taking time?

There have been more than fourteen rounds of talks since January 2022, but India and the UK have yet to reach mid-way in FTA Negotiation. This is mainly due to differences in some of the key tariff lines and investment protection rules. Some say that making a deal is unlikely during the second term of Narendra Modi which is going to end next year.

Both sides are arguing about key issues like tariffs on alcohol and scotch whiskey, rules of origin, and visas for professionals. Even though both parties want to make a deal, they haven’t reached an agreement yet, making the future of the deal uncertain.

UK negotiators want a more efficient Indian customs system. They’re also discussing intellectual property issues, particularly accommodating requests from the UK’s life sciences and biotech sectors and assessing the effectiveness of India’s IP protections.

There are contentious discussions surrounding Rules of Origin (ROO), which play a pivotal role in determining the national source of products. India is advocating for stringent ROO to thwart third-party nations from gaining undue advantages through the FTA.

There are disagreements about professional mobility. The UK is hesitant to go beyond the current annual quota of around 100,000 work visas for Indians. India argues that many skilled professionals in various sectors don’t need long-term visas because their assignments are shorter.

There are contentious discussions surrounding Rules of Origin (ROO), which play a pivotal role in determining the national source of products. India is advocating for stringent ROO to thwart third-party nations from gaining undue advantages through the FTA. Additionally, the FTA introduces new commitments related to labour and environmental standards, and India is committed to ensuring that these commitments are equitable and not disadvantageous. On the other hand, the UK is pushing for more stringent Intellectual Property Rights (IPRs), unrestricted cross-border data flow, liberal ROOs, and specific commitments in the areas of labour and the environment as part of the trade agreement.

India and UK collaboration: Road Map to 2030

In May 2021, India prime minister Narendra Modi and then UK Prime Minister Boris Johnson held a virtual bilateral summit. During the summit, both the leaders adopted an ambitious “Roadmap 2030” in that both countries agreed on working closely in the development of India’s Indigenous light combat Aircraft Mark 2. They also ensured to work on the ambitious outcome of COP26. The roadmap will expand the India and UK health partnership. It includes vaccines, supply chains, and other medical products. The leaders agreed upon to remove the trade barriers between the countries and begin the negotiations for a Free Trade Agreement. Which has been pending since then.

In September 2023, on the sidelines of the G20 Summit in New Delhi, both Prime Minister Narendra Modi and his counterpart Rishi Sunak had a bilateral meeting where they reviewed the progress of FTA and expressed hope that the issue in FTA can be ironed out and the deal will conclude sooner.  The two leaders noted with satisfaction the progress in diverse areas of bilateral cooperation as per the India-UK Comprehensive Strategic Partnership as well as the Roadmap 2030.

The India-UK Free Trade Agreement marks a significant shift in India’s trade strategy, prioritizing closer ties with Western and African nations to decrease dependency on China. In contrast, for the UK, this agreement serves as a chance to recover from losses linked to Brexit and strengthen economic connections with a major partner. The success and influence of the FTA will depend on adequately handling tariff differences, non-tariff barriers (NTBs), and carbon taxes.

India is set to become the world’s third-largest economy by 2050, having already surpassed the UK to become the fifth-largest. This makes India a preferred partner for the UK. However, it’s important to carefully evaluate the expected economic gains and drawbacks of the India-UK Free Trade Agreement to ensure a strong economic future for both countries.

(The author is a student of Business Management at Jain University, Bengaluru. The opinions expressed are the author’s own)

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