By Rajat Kathuria
India and the United Kingdom (UK) officially signed a Free Trade Agreement (FTA) on May 6, marking the culmination of over three years of negotiations that began in January 2022.
By the standards of negotiating timelines, the FTA with the UK has been rather swift. The one with the EU in particular has been languishing for almost two decades, although it has picked up momentum recently. The other vital one with the US — after initial discussions in 2017 — had not been in serious contention until earlier this year.
Timing, after all, is everything. The UK formally exited the EU in December 2020 and understandably has since sought to establish new trade relationships to compensate for the loss of EU market access. Since then, it has struck deals with Japan, Singapore, Vietnam and even entered the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP, a mega trade-bloc of 12 countries including Australia, Canada and Mexico, among others.
In many ways, the FTA with India is its most significant trade deal since leaving the EU because India is one of the world’s fastest-growing major economies. British Prime Minister Sir Keir Starmer, in the same vein as his fictional counterpart Jim Hacker might have done in the ultimate BBC comedy series of the 1980s ‘Yes, Prime Minister’, acclaimed it as the UK’s “biggest trade deal” since Brexit, and went on to describe it as the “most ambitious” agreement in India’s history. Both assertions might even be true!
The FTA promises improved access for the UK’s high-value exports — automobiles, Scotch whisky, legal and financial services, not to mention the English Premier League (EPL) — to tap into India’s famed and at times overrated middle class.
Estimates of India’s middle class population have varied between 60-350 million in recent times. Even at the lower end of the range, India offers a young and digitally savvy consumer base with vast opportunities for British technology, education, and professional services.
India is projected to move from being the fifth-largest global economy to third in the next three years. By 2035, demand for imports is on course to reach £1.38 trillion (₹147 lakh crore) per year.
India, once a force to reckon with in world trade, finds itself increasingly marginalised in world markets. Colonial exploitation brought India’s share in world trade down from around 33 percent to 2 percent at the time of independence in 1947.
Happily, the country recognises the inevitability of engaging more with the outside world to achieve its own ambition of becoming ‘Viksit’ or developed by 2047. Alas, the ‘developed India’ dream will remain unrealised without enhanced global engagement and trade. That is why the FTA with the UK, while positive, marks only the beginning of a long and hard negotiating period ahead.
These negotiations will inter alia focus on how much India can resist or delay harmonisation in standards customary in Anglo-Saxon countries (labour, environment, competition, intellectual property etc) and gain increased market access for its IT professionals and other skilled labour, always a difficult task.
Playing to comparative advantages
For now, India will gain better (duty-free or reduced duty) access for its exports – mineral fuels, machinery, precious stones, pharmaceuticals, apparel, iron and steel, and chemicals to name a few.
Significantly, the FTA also includes provisions for easing mobility for Indian professionals and students, facilitating greater access to UK opportunities, while at the same time addressing their ageing-related constraints.
For a trade economist, the FTA between India and the UK is a manifestation of the Ricardian school of thought based on comparative advantage. Two dissimilar nations with sizeable differences in levels of development and per capita incomes have much to gain from each other by specialising in their chosen areas of advantage.
For India, this is the first major FTA outside Asia. This is not to say that countries at similar and high levels of development do not gain from trade (West European countries gain extensively from what is called intra-industry trade), but arguably the gains from an India-UK deal are likely to be quite significant.
Nations engage with each other via trade because it is beneficial to do so. Accordingly, the FTA has been described as ambitious and mutually beneficial, aiming to enhance trade, investment, economic growth, job creation, and innovation in both nations.
Safeguards are also in place, naturally, to prevent immediate disruptions. The much-discussed tariff reductions on goods from the UK such as whisky, automobiles, and agricultural products have been phased in and are subject to quotas in case there is a flood of imports.. The UK, in turn, will eliminate tariffs on Indian textiles which is anticipated to boost labour-intensive manufacturing in India.
For the record, the total bilateral trade between India and the UK reached approximately £42 billion (₹4.41 lakh crore) by mid-2024 with India maintaining a trade surplus of about £8 billion (₹84,000 crore). The FTA aims to double this trade by 2030.
The UK ranks as the sixth-largest investor in India, with cumulative investments exceeding £38 billion (₹3.99 lakh crore) over the past three years in sectors such as financial services and manufacturing. India was the second-largest source of FDI in the UK in 2023.
A promising start, but more work ahead
While the India-UK FTA lays the groundwork for a more integrated economic partnership, ongoing dialogue and cooperation will be essential to reduce the divergence in standards and to fully realise the agreement’s potential benefits.
The growing importance of e-commerce, digital trade and climate change necessitates an innovative approach to trade rules that includes standards not only for finished products, but also for processes underlying their production.
For now, India has been cautious about committing to binding labour and environmental standards within the FTA, preferring non-binding “best endeavour” clauses. India is of the view that adopting ‘western’ labour standards and environmental protection straight away will interfere with its growth and development agenda.
The FTA also encourages the development of Mutual Recognition Agreements particularly in professional services, to facilitate the recognition of qualifications and licenses between the two countries. The FTA endorses initiatives like the UK-India Education and Research Initiative and promotes mutual recognition of academic qualifications to enhance student mobility and employment opportunities.
Interestingly, the University of Southampton has already begun establishing the first UK campus in India’s National Capital Region and has been permitted to offer three-year undergraduate degrees in India, even as the rest offer the now standard 4-year ones.
By signing the FTA with the UK, India has finally displayed conviction in the utility of trade agreements. Its periodic assertions of a desire to integrate into regional and global value chains seemed at odds with the stance it took on such agreements. Hopefully, this signals a new dawn, and agreements with the EU and the US will follow in due course.
Individually and collectively, these agreements, however, will not deliver unless accompanied by domestic reforms to remove structural deficiencies. These are the well-known impediments such as lack of scale, labour market rigidities, logistical pains and transactional harassment, to name a few.
The UK FTA and the others to follow can become the preferred instruments for domestic reform, thus easing the political resistance and setting the stage for an economic upgrade.
With multilateralism in an indefinite coma, cleverly negotiated FTAs can play a similar role for the Indian economy that global markets and the WTO played in the upgradation of the Chinese economy.
It is for India to squander the momentum.
Rajat Kathuria is Dean, School of Humanities and Social Sciences and Professor of Economics at the Shiv Nadar University. Views expressed here are personal.
Originally published under Creative Commons by 360info™.
