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British poll cloud over India-UK FTA, freeze on trade expansion

Editor's ChoiceBritish poll cloud over India-UK FTA, freeze on trade expansion

‘Both India and UK are in election mode. Until the top leadership is settled, many things remain hung.’

The India-UK free trade agreement (FTA) appears to be heading for another stalemate after 13 rounds of negotiations over 2 years and several deadlines, as a successful fruition of the deal looks elusive, even as the UK and India reiterated the ongoing commitment to negotiate a mutually beneficial FTA during the annual UK-India Strategic Dialogue meeting on 17 May 2024. Amidst many predictions ranging from an early harvest to the much discussed Diwali deal—that itself is now past two years—trade analysts, experts and the government, are betting on the progressive strides by both sides, the build-up of political and economic will, not to mention the lucrative spillovers of duty concessions—to craft a pact that can be gamechanger for many of India’s industry sectors.

“Both India and UK are in election mode. Until the top leadership is settled, many things remain hung,” says Arpita Mukherjee, Professor at Indian Council for Research on International Economic Relations (ICRIER). “The top leadership has to take a position as to how much they want to bend and how much they want to ignore of the issue. If they give certain instructions that of the 10 issues, let eight be resolved and leave the rest, matters can be resolved very fast,” says Mukherjee. The India-UK FTA covers 26 subjects, key ones being goods, services, intellectual property, government procurement, sanitary and phytosanitary measures, technical barriers to trade, competition, rules of origin, trade facilitation, customs cooperation, small and medium-sized enterprises, trade and sustainable development, labour, gender, digital trade, dispute settlement, general provisions and transparency.

India has been anxious to fructify the FTA with Prime Minister Narendra Modi and British counterpart Rishi Sunak reaffirming their commitment to securing a new trade deal in March this year over a call. Government records show that the 14th round of negotiations on the FTA began on 10 January 2024 and the Indian team visited the UK on 16-19 April 2024 for negotiations on outstanding issues. While there has been some headway, work is still in progress on resolving pending issues, say government sources.
For a country battling economic slowdown, the UK under Sunak, was perceived to have greater urgency in pushing the deal as securing an FTA with high-tariff country like India promises immediate and significant market access for UK products and opportunity to reap significant dividend. “Regardless of the political party in power, this FTA should be a priority. The benefits are clear and indisputable,” agrees Ajay Srivastava, founder, Global Trade Research Initiative. India’s merchandise imports from UK were USD 8.96 billion in FY2023 while UK exports worth USD 8.2 billion covering 91% value of its total merchandise imports enter India on payment of average to high tariffs duties. For example tariff on cars is 100% and on Scotch whisky and wines, it is 150%. The simple average tariff in India on goods imported from UK is 14.6%.

That apart, if the FTA happens, UK products can benefit immensely from FTA-led tariff reductions on products of UK interests. This includes automobiles. India may reduce, but not eliminate, tariffs on automobiles. For luxury cars like those from JLR, Bentley, Rolls-Royce, and Aston Martin, the UK might want zero tariffs, but India could reduce them from 100% to 50%. India might also consider allowing a few thousand units at a 25% tariff. On scotch whisky, India could reduce tariffs from 150% to 50% over a few years, similar to what it did for Australian wines. These sectors in India have had high tariff protection, even more than agricultural products. Significant tariff cuts, especially for wines, will help the Indian market grow.

“If the UK desires more comprehensive trade benefits and commitments covering a wider range of products and subjects, it can follow Australia’s example by negotiating expansions to the initial agreement,” observes Srivastava. “This approach ensures that the UK not only secures immediate gains but also lays the groundwork for deeper economic integration and broader market access in the future,” says the GTRI founder. With lots at stake on either side, attention has moved to the question of how India can ensure a fair agreement. “Basically having a good deal with India is beneficial for the UK but having a good deal with the UK is also beneficial for India but the point is not whether they want the FTA but whether we are willing to give what they want and if they are willing to give us what we want,” says Mukherjee.

Besides, as the ICRIER professor highlights, either side has certain issues, like for instance, UK does not have too many tariffs. “It is a low tariff country. Our issues will be regulatory and the extent to which the UK is willing to twist and turn its regulations and be flexible on the regulatory issues,” she adds. For India, the key factor is how far it will be able to reduce the tariff as per UK’s requirements etc., and at the same time have an FTA which is productive. According to Mukherjee, for a high tariff country, there is always a case that its FTAs will lead to unequal trade also, unless otherwise it can bring in large investments, create jobs etc. “Sometimes to gain, you may be required to carry out domestic reforms and liberalisation. Suppose India had better policy on retail FDI, then whether India does or does not liberalise, the country will get better FDI,” she adds.

There is also the flip side. Sometimes if a country puts regulations, it is not a problem but if the regulations are brought in only on the foreign investor and by not giving them the level playing field, it becomes an FTA issue. “No country prohibits you from having stringent regulations but regulations have to be non-discriminatory. In our case, with UK and EU, their major issue is that in every regulatory aspect of economic activity, we put regulations on foreign players which are not applicable to domestic players,” says Mukherjee. As per GTRI, India’s merchandise exports to the UK were valued at USD 11.41 billion but the FTA is expected to have a limited impact on increasing these exports because over half of Indian products already enter the UK with low or no tariffs. The average tariff on goods imported from India into the UK is 4.2%, according to Srivastava. “There won’t be any benefit from reducing duties for Indian products worth USD 6 billion, as they already face no tariffs in the UK, even without the FTA. These products include items like petroleum products, medicines, diamonds, machine parts, airplanes, and wooden furniture.”

Nonetheless, both India and the UK have significant gains in store from the FTA which Indian exporters and businesses are eager to tap. India stands to score big because UK can be a large export market for India, points out Arpita Mukherjee, ICRIER. “There is a large South Asian population and they like to consume Indian food. Because of their cultural synergies we also have a variety of export interest. What also makes the FTA critical is that India-UK trade has huge potential to grow, adds Mukherjee. “We can have more exports, more investments, we can create employment on both sides,” says the ICRIER professor. The catch here is that India would have to design a path as it all depends on the design of the path. “We don’t see a lot of tariff barriers or service sector barrier in the UK. If we are able to target select sector barriers like textile—zero for zero—or regulatory issues, then there is a win. If UK companies bring in investment or use India as an export hub, or shift supply chains to India and India becomes part of their resilient supply chains, there is huge benefit to that,” suggests Mukherjee.

The GTRI report lists gains from reducing duties for Indian exports valued at USD 5 billion which includes sectors such as textiles, apparel (shirts, trousers, women’s dresses, bed linen), footwear, carpets, cars, marine products, grapes, and mangoes. “These products face relatively low to moderate tariffs in the UK. For example, tariffs on yarn and fabric are 4%, while tariffs on shirts, trousers, women’s dresses, and bed linen range from 10% to 12%. Handbags and trunk cases face 8% tariffs, and footwear tariffs vary from 4% to 16%. These products will benefit from the FTA’s tariff reductions by the UK,” points out Srivastava.

Srivastava cautions that while duty elimination in the UK can help Indian exports, significant growth requires improvements in product quality. Signing an FTA alone may not lead to a substantial increase in India’s labour-intensive goods exports. For instance, India’s textiles and apparel exports to Japan did not see significant gains from the FTA. On dairy products, given opposition to reduction of tariffs in FTAs by India, the GTRI report recommends that India selectively open the sector to imports by allowing tariff reductions on predetermined quantities. Srivastava also believes that India should not agree to stop preferential treatment to domestic suppliers in government procurement chapter as allowing the UK producers to sell to India’s government procurement sector would bring them at par with Indian firms.

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