India-UK trade deal: Two willing partners and a host of hurdles in between

India-UK trade deal: While Britain isn't as attractive as the gateway to European markets post Brexit, law firms and CAs will be reluctant to let UK firms get a toehold in their sector in India

India-UK trade deal: For the first time in trade talks with a country--in this case the UK--the India government has brought in domestic interest groups to hammer out their concerns before the official discussions begin. The new template has come into play as India and UK begin negotiations for a trade deal which the UK is more keen to seal and India wants to show it can seal one.

It does not mean negotiations are going to be any less fraught. While the organised dairy farmers from Gujarat and some other states led the opposition to RCEP, law firms and chartered accountants are expected to oppose any substantive deal with the UK.

To ensure the agreement does not have to be called off like the way India’s entry into RCEP was aborted in 2019 at the last hour, Prime Minister Narendra Modi has tasked the commerce ministry to hold the widest possible consultations with domestic constituents, before making any commitments. Taking the cue, commerce minister Piyush Goyal has told business leaders a trade agreement with the UK is what India expects to sign before it does with any other country including Canada, Australia or with UAE. This shall be India's first significant trade deal since the NDA government came to power at the centre, in 2014. The one signed with Mauritius this year covered only 500 odd tariff lines.

The ministry has therefore not only taken the unusual step of setting up working groups on trade headed by joint secretaries, but has also populated with representatives of industry chambers. It mimics the route UK’s department of trade has trod on to elicit public response. These plans were in the offing since 2018 but have been dusted up recently.

India Inc always cautious

However, unlike the “information note for the consultation relating to a Free Trade Agreement between the United Kingdom and India”, issued by London, New Delhi does not plan to issue any comparable public document. It is, instead, relying on business chambers and think tanks to issue those, so that the ministry can retain an element of deniability on any of the topics.

The caution has also rubbed off on Indian industry. At a discussion with their UK counterparts in April, to estimate the timeline needed to sign an Interim Trade Agreement between the two nations, most Indian leaders said they did not expect the talks to begin in earnest within the next three months. However, surprising them, Modi and British Prime Minister Boris Johnson have held a virtual summit in May, where they discussed the possibility of a free trade agreement with “consideration of an Interim Trade Agreement for delivering early gains”. They did not set any deadlines. “The enhanced trade partnership between India and UK will generate several thousands of direct and indirect jobs in both the countries”, a release issued by the Prime Minister’s Office noted.

The total annual trade between India and the UK is about $33 billion (2019) with a trade surplus in favour of India. The UK claims the average tariff on goods exported to India is 14.6 per cent, while exports from India draw a tariff of 4.2 per cent.

Unlike the last major trade deal India signed in 2005 with Singapore which was on goods trade later extended to services, the deal with the UK shall pivot on services. Even though trade in goods represents close to two thirds (62 per cent) of total UK trade with India it is services which are expanding faster. Since 2011, UK imports of services from India have increased by 96 per cent, while its exports of services to India have risen by 109 per cent over the same period.

Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University said the India-UK agreement will depend on services the two economies could exchange. “We have always claimed, rightly, that we are a service dominated economy so this agreement shall be a test case of how much of those concerns are reflected here”.

Indian firms generate $6.07 billion of legal, accounting and management business with the UK annually. “Other business services” to the UK is consequently the largest line of trade between the two countries including both goods and services. Other than payment for professional and management consulting services, the category also includes technical and trade-related services. It is thrice India’s next largest export, that of refined oil to Britain.

Some work, some don't

Since Indian firms have used the island as their preferred landing point to tap the European market, demand for this category of business shot up over the years. With that attraction reduced, post Brexit, it could be difficult for Indian industry to get very excited or concerned about an India-UK trade deal. Yet Dilip Chenoy, secretary general of industry chamber Ficci says industry is looking forward to a trade deal with the UK. “Many sectors are keen and they hope that talks on services will also be part of the negotiations.”

Legal and accounting professionals from India will be most reluctant to let British firms get a toehold in their sector here. The UK government note also recognises this. “India is relatively more restrictive in the trade of legal and accounting services,” it noted.

An OECD index that measures the extent to which countries block services trade, sees India as fairly restrictive. The index for the 2020 shows India has far more barriers than the UK on every sort of services ranging from logistics, to insurance and computer business.

These shall be difficult to erase because India shall also need to reduce import duties on goods. From the UK those goods are mostly luxury items like those on alcohol or on cars. Reducing duty on them while also giving Britain registered professionals a toehold in a very vocal constituency of lawyers and chartered accountants is going to be a very tough political call. A rich man’s deal is how it could get painted.

Dhar says it is a challenge as to how much India can accommodate the demand to open up in these services. There are issues also about the applicability of the European General Data Protection Rules, that India has objections to. Chenoy feels there are areas where India can press for more accommodation like exports of technical textiles and machinery parts ($1.58 billion and $1.07 billion of exports from India).

On the positive side, there is a new commerce secretary at Udyog Bhawan, BVR Subrahmanyam who has strong linkages with the PMO. Also India need not be worried that the services heavy agreement with the UK shall be a template for other FTAs. Canada and Australia are commodity driven economies.

The eventual plans for engagement between the two countries are multilayered. They include not only an eventual free trade agreement between the fifth and sixth largest economies of the world, there would be an eventual Comprehensive Strategic Partnership within 2030. The volume of bilateral trade is expected to be doubled by then. The plans are part of a Roadmap 2030 adopted by them to develop a deeper and stronger engagement in the key areas of people to people contacts, trade and economy, defence and security, climate action and health, the release adds.

Table: India-UK trade ties and other indicators

UK exports to India*	Value ($ mn)	Indian exports to UK*	Value ($ mn)
Metal ores & scrap	689.2	Business Services	6,074.9
Mechanical machinery	787.4	Travel	1,353.1
Non ferrous metals	1,170.0	POL	1,232.0
Business Services	1,073.8	Textiles	1,729.3
Intellectual Propery	1,169.2	Mechanical machinery	1,069.6
Travel	1,451.4

*Years are 2019-20 for India and 2019 for UK 

Table: Key indicators

Economy snap shot*	India	UK
GDP (PPP $bln)	9.56	3.24
Trade as % of GDP	40.0	64.0
Population	1.4 billion	66.8 million
Services	56.6	71.3
Agriculture	20.2	0.6
Industry	23.2	17.4

*Years are 2019-20 for India and 2019 for UK