Central Idea

External Affairs Minister recent discussions with British PM have put the India-UK Free Trade Agreement (FTA) at the forefront of bilateral negotiations.

Why does this FTA matter?

The FTA, when finalized, is expected to not only enhance economic ties between India and the UK but also serve as a blueprint for similar agreements with India’s second-largest trading partner, the European Union (EU).

A Free Trade Agreement (FTA) is a legally binding trade pact between two or more countries or regions that aims to reduce or eliminate barriers to trade and promote economic cooperation.
FTAs are designed to facilitate the exchange of goods and services across borders by reducing or eliminating tariffs (import taxes), quotas, and various non-tariff barriers, such as regulations and licensing requirements.
These agreements are negotiated to create a more open and competitive trade environment, fostering economic growth and prosperity among the participating nations.

Economic Integration: India is reorienting its trade strategy, moving away from previous trade deals that widened deficits with East Asian countries. Instead, it’s focusing on strengthening economic integration with Western and African nations.
Reducing Dependence on China: The disruption of global supply chains during the pandemic exposed the risks of overreliance on China. Western countries, including Australia and the UK, are now seeking a ‘China-plus one’ approach in trade.
RCEP Exit: India’s exit from the China-dominated Regional Comprehensive Economic Partnership (RCEP) further underscores its desire to bolster trade ties with the UK, EU, Australia, and others as a counterbalance to China’s influence.

Crucial for UK: A trade deal with India holds significant importance for the UK, especially as it faces a challenging election in early 2025. Concerns that fueled the Brexit vote have made the UK cautious about offering work permits to Indian service sector workers under the FTA.
Market Compensation: Despite Brexit uncertainties, the vast Indian market provides London with an opportunity to offset the loss of access to the European Single Market.

India’s Gains: Indian labour-intensive sectors like apparel and gems & jewellery have struggled with declining market share. A trade deal could potentially level the playing field with competitors like Bangladesh. However, it may have repercussions on Least Developed Countries.
UK’s Advantages: Past trade deals have shown that eliminating duties doesn’t guarantee export growth. Reduction of tariffs on British exports like cars, whisky, and wines could provide deeper access to Indian markets.
Tariff Disparity: The average tariff on Indian imports to the UK is 4.2%, while the average tariff in India on goods from the UK is 14.6%, highlighting the potential for tariff alignment.

Modern FTA Scope: FTA negotiations could focus on eliminating non-tariff barriers (NTBs), which have historically hindered exports. NTBs often involve regulations, standards, testing, certification, or reshipment inspections, especially in agriculture and manufacturing.
Conformity Assessments: Indian agricultural exporters often face strict limits on contaminants, and Indian products face rejections due to conformity assessments and technical requirements.

The UK, akin to the EU, is considering a carbon border adjustment mechanism (CBAM) that imposes a carbon tax on certain imports based on emissions.
This move may affect India’s exports, even with reduced tariffs, particularly in sectors like cement, chemicals, steel, and power generation.

The India-UK Free Trade Agreement represents a strategic shift in India’s trade policy, emphasizing Western and African integration while mitigating dependence on China.
For the UK, it offers a chance to compensate for Brexit-related losses and strengthen ties with a significant economic partner.
Addressing tariff disparities, NTBs, and carbon taxes will be pivotal in shaping the FTA’s impact on both nations’ economies.