[Answered] Analyze the potential economic impacts of the proposed India-UK Free Trade Agreement on India’s economy. Discuss the sectors that are likely to benefit and those that might face challenges.

Recently there has been a discussion between India’s External Affairs Minister and the UK’s Foreign Secretary about signing India-UK Free Trade Agreement (FTA).

Potential Economic Impact of FTA

• Trade Expansion: By removing or lowering tariffs and other trade barriers, a free trade agreement between India and the UK may result in a rise in bilateral trade. This might accelerate economic growth and provide Indian exporters with new markets. A study by the UK’s Department of International Trade said that the India-UK FTA could increase India’s bilateral exports to the UK by £10.6 bn, and that of the UK by £16.7 bn.
• Investment Flows: Because there are fewer regulatory barriers for enterprises in both India and the UK to invest in each other’s markets, FTA may lead to a rise in foreign direct investment (FDI) between the two nations.
• Employment Creation: Trade and investment growth have the potential to create jobs across several industries, particularly those that see a spike in demand as a result of higher exports.

Sectors which are likely to benefit

• Information technology and services: India has a robust IT industry, and more IT services could be exported to the UK as a result of an FTA.
• Textiles and clothing: Lower tariffs could help India’s labour intensive sectors like the textile and clothing sector get better access to the UK market.
• Automobiles and Engineering: Lower trade barriers could result in more Indian engineering and automobile exports to the UK.
• Pharmaceuticals: A significant participant in the pharmaceutical sector in India. Increased shipments of generic medications to the UK could result from an FTA.

Challenges that might be faced by these sectors

• Carbon Tax: Similar to the European Union, the United Kingdom is considering implementing a carbon border adjustment mechanism (CBAM) on metal imports, tying them to carbon emissions. The adoption of such a mechanism by the UK, akin to the EU’s approach, could adversely impact India’s exports to the UK, even if India secures substantial tariff reductions.
• Non-Tariff barriers: NTBs, which commonly manifest as regulations, standards, testing, certification, or pre-shipment inspections, are a significant concern in the ongoing negotiations. Vegetable and fruit exporters, for instance, frequently encounter stringent limitations imposed by European economies concerning pesticides and other contaminants in agricultural imports.

Conclusion

Before proceeding with the negotiations, India should weigh the economic advantages and disadvantages of the India-UK Free Trade Agreement, paying particular attention to the sections about digital trade, labour, the environment, and intellectual property rights.