The UK-India trade agreement: what do we know about the deal?

There is undeniably an economic opportunity in forging a closer trading relationship with the world’s fastest growing economy. With a market of 1.4 billion consumers, India’s $4 trillion economy accounts for over 7 percent of global GDP, with bilateral UK-India trade increasing substantially over the last decade to over £43 billion per year.

The already strong trading relationship exists despite the UK and India not having a trade agreement in place. India also has some of the most significant barriers to trade in the world, including the highest average tariffs of any G20 economy, with some products incurring duties of over 100 percent. Regulatory barriers are also high in some areas, with the UK government estimating that over 400 technical and procedural restrictions are currently in place in the Indian market.

So with much to gain from a trade agreement, businesses in both countries are looking to understand more about what has been negotiated and are beginning to plan their commercial strategies around the future of this important trade corridor. While we don’t yet have all of the details, there are many features of the FTA to take stock of so far.

What are the main components?

Tariffs. The core deliverable of this FTA is tariff reduction. India has agreed to reduce tariffs on 90 percent of tariff lines, with 85 percent of those becoming fully tariff-free within a decade. At the time of entry into force, 64 percent of all tariff lines will be tariff-free, which is expected to cover almost £2 billion of UK exports.

Producers of food and drinks products look set to capitalise in particular, with tariffs on whisky and gin cut from 150 percent to 75 percent, before reducing to 40 percent by year ten of the agreement. Tariffs will also be reduced on other agri-food products such as British lamb (33 percent to zero immediately) and soft drinks (33 percent to zero after seven years). Further tariffs will be reduced on salmon, chocolate, biscuits – and a range of products from other sectors such as cosmetics, medical devices, electrical machinery and aerospace equipment.

UK car manufacturers exporting to India also look set to benefit from a significant tariff reduction – from 100 percent currently to just 10 percent, but importantly this reduction is subject to a quota, meaning that only a certain number of cars can qualify for the lower rate each year. This will start with petrol and diesel cars but will transition to high-value electric vehicles, with the quota set at 22,000 cars.

As with all negotiations, there has been give and take on both sides – so the UK has agreed to lower tariffs on a range of Indian exports too. These include duties on clothing, footwear, cosmetics, toiletries, frozen food and jewellery. India will also benefit from a quota to sell low and mid-range electric vehicles to the UK.

In total, UK tariffs will be eliminated on 99 percent of Indian goods. The UK government has stated this will “provide better choice, quality and affordability of a wide range of Indian products” – however, it will also be expected to increase the level of competition for these goods within the UK market. There are several goods excluded from UK tariff reductions, including sugar, pork, chicken and eggs.

Rules of Origin. As traders know well, tariff reductions are important but only if they can actually be utilised. Often it is the origin of the product for customs purposes which is the determining factor. Helpfully, the UK government has stated that it has “secured India’s best ever agreement on Rules of Origin” which will require that a product must either be wholly obtained or significantly transformed through processing in either country.

Customs and trade facilitation. The FTA will commit both sides to maintaining non-discriminatory and transparent customs procedures, including specific simplifications for eligible traders, such as duty deferral and the ability to pay duties covering several different imports at periodic intervals. Both sides have also agreed to adopt a target of 48 hours for goods to be released from customs. These commitments should help to give confidence to exporters and make it easier for businesses to trade in the Indian market for the first time.

Mobility.  The FTA will lock-in existing business mobility rules covering short-term, temporary and limited business travel in both directions. These enable professionals to travel between each economy to attend conferences, transfer to an Indian branch of their organisation and supply a service as part of a contract.

In addition, Business Secretary Jonathan Reynolds has stated that some temporary Indian workers will be able to qualify for an existing UK visa route for the first time, but it will be capped at 1,800 people. The newly available route covers certain professions, including chefs and musicians.

Alongside the FTA, the two countries have agreed to negotiate a Double Contributions Convention, which will enable employees temporarily working abroad for up to three years in the UK or in India to make social security contributions only in their home country rather than potentially paying twice.

Procurement. The trade agreement will guarantee access for some UK businesses to India’s government procurement market, including for goods, services and construction projects. In particular, UK companies with at least 20 percent of their product or service originating from the UK will be treated as a “class two local supplier”, giving them the same status as some (but not all) Indian business. UK firms will also be given access to India’s procurement portal so they have the information required to maximise their opportunity in the market.

Services. The FTA is expected to ‘lock-in’ existing levels of access for UK services suppliers to the Indian market. In particular, it will include guarantees for telecommunications, environmental and construction services that they will not be subject to establishment or nationality requirements, or limits on the number of businesses able to operate within a market.

The UK government has stated that the agreement will “ensure that UK banks and finance companies are placed on an equal footing with Indian suppliers” and that existing limits on UK ownership or investment into Indian financial services firms will be maintained at 74 percent. The FTA will also contain provisions to encourage the recognition of professional qualifications in the future, by permitting relevant UK and Indian professional bodies to enter into negotiations on mutual recognition agreements.

While it doesn’t appear that the trade agreement will enable significant new market access for services which didn’t exist before, these terms will nevertheless help to provide valuable certainty to the UK’s world-class services exporters.

Digital. The UK government has stated that the FTA contains “India’s best ever commitments on digital trade”, which are expected to include commitments to promote digital trading systems, electronic authentication and paperless trade. The agreement also includes provisions designed to protect businesses from the forced transfer of source codes and protect consumers against unsolicited spam messages.

The FTA does not provide guarantees on the free flow of data across borders, but gives the UK the opportunity to negotiate data localisation rules if India makes any relevant commitments with other trading partners.

Intellectual Property. The FTA will include provisions designed to improve patent procedures in India to speed up the process, reduce bureaucracy and improve transparency. It will also enshrine existing copyright protections designed to benefit the creative sector, including a guarantee that their work will continue to be protected in India for at least 60 years. India has also agreed to conduct an internal review of their copyright protection terms and engage in a dialogue on wider aspects of copyright and related rights, including on artist’s resale rights and royalty rights.

Other chapters. The final treaty text will include provisions to support shared goals and aspirations in a range of other areas, including on anti-corruption, consumer protection, labour rights, the environment, gender equality, development and on innovation in key technologies such as advanced manufacturing. There will also be bespoke support guaranteed for the UK’s small and medium-sized enterprises exporting to India, with a commitment from India to address trade barriers specifically affecting these firms.

The UK and India are also still negotiating a bilateral investment treaty (BIT) which could include protections for foreign investors and their investments, and establish dispute resolution procedures.

What’s the impact?

The UK government is forecasting bilateral trade to increase by £25.5 billion and UK GDP to increase by £4.8 billion each year over the long run (after 15 years). This equates to an increase of 0.1 percent of UK GDP.

While the FTA isn’t expected to be transformative in economic terms for the UK as a whole (at least in the immediate future), the benefits may be significant for those businesses operating in key markets or exporting certain goods to India which will qualify for considerably lower tariffs. Sectors which could benefit the most include food and drink, automotive, other consumer goods and industrial manufacturing sectors, in addition to creative industries.

What’s next and what should I be doing now?

We don’t yet have the full text of the draft treaty, so there is a limit to the information currently in the public domain. The UK government has issued a press release and explanation of the trade agreement and ministers have spoken about the FTA in the media. When further information is made available, we will know more about what is missing, and in particular where the UK has made compromises in negotiations.

Now that negotiations have concluded, the two sides will finalise and verify the legal text of the treaty before signing the agreement.  As is usual with UK trade agreements, the Trade and Agriculture Commission will conduct its independent scrutiny of the draft FTA and produce a report, to which the UK government will respond. At this stage, any legislation necessary to implement the trade agreement will be introduced to Parliament. The draft treaty will then be ratified and will enter into force once both the UK and India have completed ratification.

This trade agreement is the largest new bilateral FTA that the UK has concluded since leaving the European Union. Businesses with a mention above should therefore be assessing the scale of the opportunity, what it means for their sector and business model. Specifically, firms should be thinking about how tariff reductions could benefit them, where existing trade barriers lie and whether the FTA could help to make trade easier and more profitable.

For further support in understanding the trade agreement and what it means for you, Deloitte’s specialists are on hand to help.