Gains and giveaways from the India-UK free trade agreement, in 5 charts
Summary
The recently signed India-UK free trade agreement holds more for the UK on the goods side and for India on the services side.The free trade agreement (FTA) signed recently by India and the UK has been touted by both sides as historic. The Indian government claims 99% of Indian exports will benefit from zero duty. More importantly, employees of Indian firms who have been transferred to the UK for work don’t have to make social security contributions for three years – a measure aimed at reducing employee costs. From the UK's perspective, Indian tariffs on products such as alcoholic beverages (including Scotch whisky), food products and cars are set to drop.
Days after the deal was announced, the UK concluded a separate deal with the US. The UK government estimates the India-UK FTA will add an additional 25.5 billion pounds in trade per year between the two countries in the long term (based on forecasts of trade and GDP for 2040 for the UK economy). It also expects UK exports to India to register greater gains than Indian exports to the UK.
Currently, the UK accounts for just 1% of India’s import basket, while 3% of Indian exports go to the UK. A major motivation for the FTA was the UK's exit from the European Union. When Brexit came into effect in 2020, Indian exports to the UK dipped, but picked up substantially in the years after that, as did imports from the UK. India currently has a positive and growing trade balance with the UK, but this could narrow if the UK makes greater gains on the export front.
Tariff balance
Average tariffs imposed by both countries on the other have been trending downward this century. Also, average Indian tariffs on imports from the UK have remained higher than the average tariffs the UK imposes on Indian exports. In 2020, average tariffs imposed by the UK on Indian goods were about 3%. Post-Brexit, those tariffs are below 1% on average, though they remain high for certain categories of goods.
Thus, going into the FTA, UK tariffs on Indian exports, on average, were already low and declining. On the other hand, average tariffs imposed by India on goods coming from the UK have remained around 13-15% in recent years. Thus, aside from specific categories of goods where UK tariffs on Indian goods were high, in aggregate terms, the deal will likely benefit the UK to a greater extent, given that Indian tariffs had more room to come down.
Also read: India-UK FTA sets precedent with dedicated anti-corruption, anti-bribery chapter
Import gains
Four broad sectors account for three-fourths of UK exports to India: stone and glass products (precious stones), machinery and electrical goods, metals and chemicals. Average tariffs on these goods range from 11-28%, according to the World Bank’s World Integrated Trade Solution (WITS) database. The highest tariffs – around 143% on average – are on food products such as scotch whisky or chocolates. These are expected to fall substantially. On whisky and gin, India has committed to roughly halving tariffs to 75% initially, with further cuts spread over 10 years.
According to the UK government’s estimates, tariffs imposed by India are expected to see a reduction of 95.5 percentage points on agricultural and food products, and around 5.2 percentage points on industrial goods. Another important sector likely to see big reductions is transport goods (like cars), where the weighted tariff is currently around 52%. In this case, tariffs are expected to fall to around 10%, with a quota.
Also read | India-UK FTA: Can exporters seize the opportunity amid tough competition?
Movement of people
On average, UK tariffs on Indian goods are already very low. However, in some sectors, especially those related to agricultural goods (vegetable or animal products such as meat), average tariffs are 320-330%. Successive British governments have sought to protect their farm sector from an influx of cheap agricultural imports. In this case, the reduction of British tariffs on such imports is not substantial.
Thus, for India, the real benefits of the FTA may not necessarily be from trade in goods. Instead, they might be from trade in services and the movement of labour – a case in point being the three-year exemption on social security contributions.
Also read: The India-UK free trade deal is a game-changer for bilateral trade relations
Indians account for the highest number of long-term migrants to the UK, outside of the European Union. The Indian government says it has secured concessions on skilled labour migration to the UK, though the concessions have not been stated. Some reports say the UK has not allowed greater movement of labour.
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