What is the India and UK free trade deal all about?
At the start of 2022, the UK and India announced their intention to negotiate a free trade agreement (FTA) between the two countries. Up until recently, Diwali was the informal deadline for the agreement to be signed – for obvious symbolic reasons – but that date has come and gone. So what happens now?
The deal is still on the table
According to news reports, the deal is almost agreed and will, according to UK trade minister Greg Hands, be signed once the UK is satisfied that it’s fair and reciprocal. One of the key stumbling blocks appears to be migration: a key demand from the Indian negotiating team has been visa liberalisation to make it easier for Indian citizens to migrate in greater numbers to the UK. There appear to be tensions within the UK government on this specific point, which potentially accounts for the delay.
What is the opportunity?
By GDP, India is the 5th largest economy in the world (the UK is 6th). It’s one of the fastest growing too, thanks to a burgeoning middle class, forecast to grow to a quarter of a billion consumers by 2050. By 2050, India is forecast to be third largest economy in the world – after the US and China – with a population greater than the US and the EU combined.
The UK Government claims that an FTA has the potential to almost double UK exports to India, boosting the value of trade by as much as £28 billion a year by 2035, and increasing wages across the UK by £3 billion. Investment from Indian companies already supports 95,000 jobs across the UK.
Aside from economic benefits – important to a UK Government keen to demonstrate trade advantages post-Brexit – there’s also a geo-political strategic goal. The UK Government is keen to tilt towards the Indo-Pacific, home to half the world’s population and half the world’s economic growth. An FTA with India, alongside the UK’s imminent membership of the massive Asia-Pacific trading bloc CPTPP, will help to orient the UK towards the East.
A trade agreement with India would make trade easier and cheaper for UK exporters, whilst improving choice and value for UK consumers. In 2019, India imported £5.35 billion of goods from the UK, of which £5.24 billion were subject to tariffs. Removal of India’s tariffs on imports in a potential FTA would save British companies money and increase the competitiveness of UK products.
After the US, India has the greatest number of English speakers in the world. Being able to use English as a common language will help British and Indian businesses cooperate under an FTA.
Which sectors would benefit?
Key sectors to benefit from an India/UK trade deal include:
India’s burgeoning middle class means increasing demand for personal mobility. This, plus the country’s long-term ambition to transition to electric vehicles, presents major opportunities for UK automotive companies. Currently, applied tariffs for vehicle manufacturers are 125%. Reducing these would boost the UK’s automotive industry, with regional gains most obvious in the West Midlands.
The UK’s services exports to India amount to £5.7 billion per year, while India has an expanding services sector which accounts for 54% of its economy. As the world’s second largest services exporter, the UK is well placed to support Indian growth through its provision of financial, creative, digital, professional, and technology services.
The UK and India’s financial markets are already interconnected, with 35 Indian companies listed on the London Stock Exchange. A trade agreement could enable further collaboration in these areas by easing cross-border friction and encouraging regulatory alignment, allowing the UK’s financial and professional services businesses to offer expertise, increase trade, and stimulate the Indian market.
Internet penetration in India surpassed 50% in 2020, equating to over 622 million users. India’s government is serious about digital transformation, aiming to have a trillion-dollar online economy by 2025. An FTA presents an opportunity for British and Indian businesses to deepen commercial collaborations in fields such as emerging tech, artificial intelligence, and cybersecurity. The FTA includes a digital chapter which aims for predictable and open regulatory principles so that firms can access digital markets and operate across borders freely.
Indian students are the second largest international student population in the UK and there is already frequent collaboration between UK and Indian higher education institutions on research projects. An FTA could build upon the productive relationship between both countries’ research sectors, facilitating more interdisciplinary research in areas such as pharmaceuticals and life sciences.
India is the world’s biggest whisky-drinking market and therefore represents a big opportunity for the UK’s Scotch whisky industry. At the moment, Scotch whisky imports to India are subject to 150% tariffs – it’s hoped that an FTA will reduce those, which in turn will reduce costs and support jobs in brewers and distillers throughout the UK. That said, the whisky industry remains concerned that various bureaucratic barriers – particularly at Indian state level – would still need to be removed to make a tariff reduction worthwhile.
A note of caution?
Aside from migration, one of the remaining stumbling blocks appears to be data. Historically, India has adopted a protectionist stance when it comes to data being transferred out of its region and makes it hard for companies to store data outside its borders and operate in the country without setting up there first.
Securing the free flow of data between the two countries plus strong protections for intellectual property rights were key overall objectives for the deal set out in the UK’s strategic approach for talks in January. If the final deal fails to achieve these goals, then it will probably fail to provide meaningful access for UK tech, digital and financial services companies.
Some sceptics predict that the final deal will involve only a narrow set of tariff reductions rather than anything significant that will change the cost of doing business in India for UK companies. This remains to be seen – we will probably find out in 2023.
India and the UK – key stats:
- The total value of trade in goods and services (exports plus imports) between India and the UK stood at £25.7 billion in 2021-22
- India is currently the UK’s 12th largest trading partner
- Services make up about 70% of annual trade between the two countries
- 5 million British nationals are of Indian origin
- India’s main exports to the UK include ready-made clothes and textiles, gems and jewellery, engineering goods, petroleum and petrochemical products, transport equipment and parts, spices, metal products, machinery and instruments, pharmaceuticals and marine items
- The UK’s main exports to India include metal ores and scrap, mechanical power generators, crude oil and general industrial machinery, as well as business services, transportation, telecommunications, computer and information services
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