Economy
Why India is warming up to a trade deal with UK
Summary
- India and the UK enjoy high complementarities in trade, and an early trade deal serves the geopolitical and economic interests of the two G-20 economies
More than a year after pulling out of the China-led regional comprehensive economic partnership (RCEP), India has stepped up its efforts to negotiate free trade agreements (FTAs) with other major economies. Separate discussions are currently underway with the UK and the European Union (EU), with possibilities being explored for early harvest deals before eventually moving towards full-fledged FTAs.
FTA talks between India and the EU had come to a halt in 2013 after the two sides failed to resolve major differences over its scope. The dynamics today are different since the UK, which was India’s major trading partner in the EU, is no longer a part of the EU. Post Brexit, the UK is now positioned to strike a trade deal with India on its own rather than as part of a large trading bloc. The EU itself is more amenable to a trade deal with India today than it was 8 years ago as it seeks to diversify supply chains. Yet, it will take longer for India and EU to resolve outstanding issues than for India and UK to hammer out a trade deal.
The two countries have already set the ball rolling. In May this year, India and the UK unveiled a 10-year roadmap which included an “enhanced trade partnership (ETP)" agreement to reduce market barriers and a commitment to double bilateral trade by 2030. Formal negotiations for an FTA are likely to start later this year.
A trade deal with India is likely to come as a shot in the arm for the Boris Johnson government as it tries to showcase gains from Brexit. For India, this is an opportunity to showcase itself as an alternative trading partner to China in a post-covid world. It also helps India demonstrate its commitment towards freer trade without much risk of incurring large trade deficits.
Vital Partners
The total trade between India and the UK is currently around $33 billion per year, including $15 billion worth of trade in goods and the rest in services. The UK is amongst India’s top ten exporting destinations while India is UK’s sixth-largest non-EU trading partner. India’s major exports to the UK include clothing, pharmaceuticals, refined oil and metal manufactures. The UK’s key exports to India comprise metal ores, non-ferrous metals, electrical goods and general industrial machinery. Overall, the trading patterns between the two countries show a high degree of complementarity, with India’s export basket having a high match with UK’s import basket, and vice-versa.
FDI inflows from the UK to India have also grown steadily, with the UK being the sixth largest source of FDI in India <> since 2000. But given the lingering tax disputes involving Vodafone and Cairn Energy, the UK may well push for greater policy certainty in investment deals during the FTA negotiations.
Untapped Potential
The two countries would also aim to reduce tariff and non-tariff barriers that are holding up trade potential between the two economies. According to the International Trade Centre (ITC), the Indian products with greatest export potential are jewellery (of precious metals), diamonds and medicaments. The UK products with the highest export potential include turbojets, whiskies, and airplane/helicopter parts.
The food and beverages sector in particular may be a low-hanging fruit where there could be significantly greater trade than has been the case so far. The Indian government is also looking to engage with the UK on textiles, handicrafts, leather, furniture, industrial machinery, and toys and has expressed interest in enabling greater market access for UK’s tech-based products, high-quality cameras, medical devices, automobiles, and spirits.
Net Positive
The past few months have shown how the global economic engine can help keep the Indian economy afloat at a time when domestic demand remains weak. This potential can be exploited further if our policymakers take export markets seriously, and give up their fear of FTAs. After all, the government’s own economic survey (2019-20) shows that FTAs have on average boosted rather than harmed Indian exports.
Between 1993 and 2018, India’s exports of manufactured products to countries with which it had trade agreements grew at an annual average of 13.4% while imports from such countries grew by 12.7%. It is worth noting that much of imports in today’s complex supply chains invariably end up getting used for exports, and hence easing imports can often help a country raise its export profile.
The India-UK trade deal should be the first step for the country to integrate further with like-minded democracies, and undo the protectionist barriers erected in recent years.
Puneet Kumar Arora is an assistant professor of economics at Delhi Technological University
