UK trade with India

This week, the UK and India formally began negotiations on a Free Trade Agreement. There are clear benefits to businesses and consumers on both sides in liberalising trade and investment flows between the two countries, with the UK government estimating an FTA could increase bilateral trade by up to £28 billion per year.

An agreement could make it easier and cheaper to do business with India by removing or reducing a range of prohibitive tariffs currently applied to British exports. Of the £5.4 billion of UK goods imported each year to India, £5.2 billion are subject to duties (which average 19% but can be considerably higher on some products). As a major services exporter, the UK would also benefit from more liberal access to India’s growing services sector, which currently accounts for 54% of its economy. The two sides will also seek to deepen the existing strong bilateral investment relationship which is estimated to already underpin half a million jobs.

While the prizes on offer are undoubtedly great, both for businesses and consumers, UK negotiators may also encounter obstacles. India hasn’t signed a major trade agreement in over a decade – indeed, negotiations held in recent years have all collapsed, including with the EU, Australia and over India’s potential accession to RCEP and CPTPP. It is unclear whether India has a willingness to offer the level of market access for both goods and services the UK will be seeking.

Nevertheless, the UK and Indian governments have agreed an ambitious timeline for negotiations to have concluded by the end of 2022, each negotiating round lasting a fortnight with 5-week breaks. The second round of negotiations is expected to be held in early March, with both sides said to be open to a potential “early harvest” agreement after a few months as the first phase of a more comprehensive package.

The opportunity for exporters

Given the size of the Indian economy, its projected growth and the relatively high barriers to trade currently in place, this FTA represents a considerable economic opportunity – particularly compared to other trade agreements the UK is striking (for instance with smaller economies like Australia and New Zealand where trade barriers are generally already low).

India applies tariffs to a wide range of products, many of which simply make it unviable to export. While the 150% tariff on Scotch whisky is perhaps the most widely quoted example, lower rates of duty over thousands of tariff lines are nevertheless inhibiting the potential of UK exports in a market of 1.3 billion consumers. Moreover, differences in production standards and processes, testing requirements, certification and labelling (known as “technical barriers to trade”) complicate matters further and introduce additional costs.

Fig 1: Selected applied rates of duty in India for some notable UK exports

What may be even more consequential is a more liberalised services market for UK businesses selling to India. The UK has a clear interest in negotiating greater market access for a wide range of services suppliers from lawyers to architects, builders, accountants and consultants, who cannot easily trade cross-border because of domestic regulation such as requirements on establishment, corporate form, nationality, board composition, employee quotas, equity caps and transaction values.

For some vocations, it is simply a case of their UK qualifications not being recognised in the Indian market. An agreement on the mutual recognition of qualifications (MRPQ) would be highly valuable, although such an arrangement would be based on reciprocity – i.e. if UK qualifications become valid in India, then Indian-qualified professionals will also be able to operate in the UK (without taking prior examinations, as if often the case). Given the relative sizes of each market and possible differences in professional practices, negotiators will be mindful of the potential for MRPQ to have distorting effects on their domestic economies.

The supply of services is also enabled by the ability of professionals to travel between two territories largely unobstructed. Indeed, improved visa access has long been a high priority for the Indian government in many of its trade agreement negotiations. Historically the UK has been unable or unwilling to liberalise rules around movement of people, however new flexibility post-Brexit means that accommodating these interests is now easier under the points-based immigration regime than was previously possible. The UK has already gone some way to satisfying Indian concerns, including by establishing a post-study work visa and a young professionals scheme as part of a mobility package agreed last year. Nevertheless, Indian negotiators will want to press the UK to go further, for instance by broadening access to other categories of travellers, raising numerical caps and changing obligations on social security contributions.

Similarly, the UK may now consider that it has greater flexibility to agree a range of commitments on the free flow of data, which in a globalised economy can be as important as limiting traditional restrictions to goods and services. India has a large and growing digital market, yet is thought to be increasingly liable to regulate in this area, for instance on forced data localisation and the potential introduction of customs duties on the movement of data cross-border.

India is not a signatory to the WTO Government Procurement Agreement, and with an estimated 30% of Indian GDP generated from the public sector, fairer access to this market could be a significant benefit to UK business. In particular, India’s burgeoning middle class is a large potential buyer of UK professional services - and the country has a large defence budget of $65.5bn, with 1.4 million active personnel, so is a significant destination for the UK’s important defence and aerospace sector.

A long and winding road?

Trade negotiations are usually lengthy processes at the best of times. The scale and complexity of this proposed FTA is almost certain to result in a more protracted negotiation than has been the case with the UK’s other recent agreements with Australia and New Zealand. The exception could be if a small “early harvest” agreement is reached – but that does run a risk of removing the incentive to tackle the most difficult (and often most valuable) aspects of a more comprehensive FTA. There are of course also a wide range of other thorny issues not highlighted in this article (such as Intellectual Property) where landing zones might be difficult to identify.

That said, this negotiation could well represent Britain’s most consequential new trade agreement after leaving the European Union. UK businesses should be assessing the scale of the opportunity, what it means for their sector and business model. For further information, take a look at the government’s press release and outline negotiating objectives – and Deloitte’s specialists are always on hand to help.