On the India-UK Trade Deal – Prospects & challenges

Source: This post on the India-UK Trade Deal is based on the article “India-UK trade deal: Prospects & challenges” published in Business Standard on 9^th November 2023.

UPSC Syllabus Topic: GS Paper 2 International Relations – Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

News: The article discusses the Free Trade Agreement (FTA) between India and the UK. It looks at how this deal could help various sectors by reducing tariffs, easing visa rules for Indian professionals, and addressing investment. It also highlights challenges like environmental standards and data protection.

What is the current status of India-UK trade relations?

India and the UK are finalizing a free trade agreement, expected to be signed by year-end.

Bilateral trade between the countries exceeded $44.3 billion in the 2022-23 financial year.

India exported goods and services worth $25.8 billion to the UK, enjoying an $8 billion trade surplus.

What are the benefits of an FTA between India and the UK?

Benefits for India:

Increased Export Competitiveness: Indian exports facing high UK tariffs, such as textiles and apparel, will benefit from tariff elimination. These sectors contribute $5 billion in exports and stand to become more competitive in the UK market.

Services Sector Expansion: Indian IT services could see growth with eased UK visa processes, crucial for the sector that caters significantly to the UK market.

Investment Inflows: The simultaneous negotiation of a Bilateral Investment Treaty (BIT) promises better investment protection, potentially leading to increased UK investment in India.

Benefits for the UK:

Tariff Reduction in India: UK products like cars and Scotch whisky, currently taxed heavily in India (100-125% for cars, 150% for whisky), could see reduced tariffs, lowering costs and enhancing their market position.

Level-Playing Field: The FTA aims to give UK companies access to India’s government procurement market, leveling the playing field against Indian firms and opening new business avenues.

Industrial Benefits: UK exports such as silver, which faced a 12.5% tariff, and other heavily taxed goods, will gain from reduced Indian tariffs, increasing their competitiveness in the Indian market.

What are the challenges associated with this FTA?

Tariff Negotiation Challenges: Indian goods like pharmaceuticals, which already have zero tariffs, won’t benefit from the FTA. While UK exports to India, such as cars and whisky, are highly taxed (cars at 100-125% and whisky at 150%), this may be reduced but not fully eliminated.

Environmental and Labor Standards: India is cautious about committing to stringent sustainability criteria and labor standards within the FTA, fearing they may become non-tariff barriers.

Market Access and Equal Treatment: The UK desires equal market access in all sectors, a demand that India is expected to resist. In particular, the competitive and restrictive nature of India’s government procurement market may hinder UK firms seeking a level playing field.

What should be done?

Negotiate Social Security Contributions: A totalization agreement should be included to exempt Indian workers from UK social security payments, acknowledging their short stays.

Treaty Alignment: The FTA and BIT (Bilateral Investment Treaty) negotiations should be aligned to complement each other effectively.

Safeguard Digital Economy: India should maintain its stance on data protection to preserve its digital sovereignty, avoiding unfettered cross-border data flows.

Prepare for Carbon Border Adjustment Mechanism: India should negotiate FTA terms that consider the potential impact of the UK’s proposed carbon border adjustment mechanism on Indian exports.

Terminology used:

Totalization Agreements: It serves as bilateral deals to stop double payment of social security taxes by workers abroad. They ensure that employees don’t pay these taxes to both their home country and the country where they work on the same earnings.

Question for practice:

Examine the potential challenges and benefits for both India and the UK upon the finalizing of a free trade agreement?