Possible outcomes of India-UK trade deal

India faces complex negotiations ahead that could restrict domestic policy space and economic interests

In a telephonic conversation on March 12, the Prime Ministers of India and the UK agreed to work towards the early conclusion of a mutually beneficial free trade agreement (FTA). We can expect the India-UK FTA to be signed soon after a new government is formed in India post-elections.

For the UK, the FTA is part of a strategy to establish new trade partnerships following its departure from the European Union. Meanwhile, India is concluding new FTAs in fast-track mode, as if to change its image of becoming protectionist. The shift came after India suddenly withdrew from the 16-nation Regional Comprehensive Economic Partnership (RCEP) negotiations in November 2019.

In the last four years, India has signed FTAs with Mauritius, the UAE, Australia, and the European Free Trade Association (EFTA) countries (Switzerland, Norway, Iceland, and Liechtenstein) in a fast-track mode. The FTA with the UK will be the fifth one signed by India after exiting the RCEP.

India’s FTA partners warmly reciprocate the fast-track negotiation strategy, as the FTA with India allows access to a large and growing market, bypassing high tariff walls.

The FTA is expected to boost bilateral trade flows. In FY23, trade between India and the UK exceeded $57 billion, with India earning $13.34 billion more than it spent. India sold $11.40 billion in goods and $23.80 billion in services to the UK and bought goods worth $8.96 billion and services worth $12.90 billion from the UK.

Both countries started negotiating the FTA in January 2022. The negotiations cover 26 subjects, including merchandise and services trade, intellectual property, government procurement, rules of origin, trade and sustainable development, labour, gender, and digital trade. Here are the expected outcomes in major negotiating subjects:

Merchandise trade: Over half of India’s exports to the UK, valued at $6 billion and including items like petroleum, medicines, diamonds, machine parts, airplanes, and wooden furniture, already enter the UK without any import tariffs. Therefore, these exports won’t gain any additional advantages from the tariff reductions brought about by the FTA. However, Indian exports to the UK, valued at $5 billion, including textiles, clothing, footwear, carpets, cars, seafood, grapes, and mangoes, which currently face tariffs in the UK, will benefit from tariff elimination under the new FTA.

UK’s gain in merchandise trade will be higher, as 91 per cent of its products enter India at average to high import tariffs. Most such products will gain from tariff elimination by India. India might cut import tariffs on cars from the UK from 100 per cent to 50 per cent and allow a small number of cars at an even lower tariff of 25 per cent. India has already reduced tariffs on electric vehicles from as high as 100 per cent to just 15 per cent, indicating that India may offer a better deal to the UK, subject to some tangible returns. Similarly, for wines, India might lower taxes from 150 per cent to 25 per cent over 10 years, just like it did for Australian and Swiss wines. Overall, over 90 per cent bilateral trade will flow tariff-free in a few years, leading to higher trade volumes.

Services: India seeks greater market access for its information technology (IT) and software companies. It has requested the UK to issue priority visas to Indian professionals for short-term assignments. However, securing a significant number of short-duration business visas may be challenging due to the UK’s immigration concerns post-Brexit. The UK will likely push for Indian commitments to open up telecommunications, legal, and financial services to foreign competition.

Allowing UK producers to sell to India’s government procurement sector would bring them in line with Indian firms. However, Indian firms face a very competitive and restricted government procurement market in the UK, with little business prospects. India needs to be conservative and careful.

The negotiations in non-trade issues cover several complex areas that could restrict India’s domestic policy space and economic interests. Let us discuss the key issues:

1. India prefers to maintain the ability to mandate data localisation to protect its digital economy and startups. The UK seeks free data flows and minimal barriers to digital trade.

2. As a developed country, the UK seeks to incorporate high environmental and labour standards in the FTA text. India is cautious about stringent standards that could impose economic burdens or impact its competitive advantage.

3. India is aware that even reiterating international commitments (for example, International Labour Organization conventions, Paris Agreements) in the FTA could transform previously non-binding commitments into enforceable obligations. This could also limit flexibility in policymaking and provide legal justifications for the UK to impose non-tariff barriers on India’s textiles and other labour-intensive exports under the guise of promoting sustainability.

4. India is cautious about adopting TRIPS-plus standards that could affect its generic pharmaceutical industry and access to medicines. The UK seeks provisions for data exclusivity that prevent generic manufacturers from relying on clinical trial data submitted by originator companies for a certain period. India may not agree to this, as data exclusivity could delay the entry of generics and impact access to affordable medicines within India and in countries that rely on Indian generics.

5. Another problem is that India has already made many commitments on new issues like sustainability, labour, and intellectual property rights in its FTA with EFTA countries. It might face pressure to adopt even more ambitious commitments in the FTA with the UK.

6. The UK and India are also negotiating a bilateral investment treaty (BIT). The UK is unwilling to sign the FTA without finalising the BIT. Both countries have vast differences in approach, but may agree to common ground as the time to conclude the FTA nears.

7. The UK Carbon Border Adjustment Mechanism (CBAM) , likely to be implemented from January 2026, is the big elephant in the room. With CBAM, UK products could enter India without tariffs, but Indian exports to the UK might face a tariff equivalent of 12-24 per cent as CBAM charges. India must seek clarity before finalising the FTA.

The FTA with the UK will be India’s 15th comprehensive trade deal. It’s time the government shares details on how past FTAs have influenced exports, imports, investments, and other areas over the years. The findings could provide valuable insights to trading firms and help shape current trade discussions.

The writer is the founder of Global Trade Research Initiative (www.gtri.co.in)