What is the significance of the India-U.K. free trade agreement? -OxBig News Network

The story so far: Bringing to a conclusive end negotiations that lasted for nearly three-and-half years, India and the United Kingdom agreed to move ahead with the free trade agreement (FTA). Commerce Minister Piyush Goyal said the trade agreement would set a new benchmark for “equitable and ambitious trade between two large economies”. He also underlined it as a potential catalyst to spur trade, investment, growth, innovation and for creating jobs in both economies. The Prime Ministers of the two countries are expected to meet in India soon to officially ratify the deal.

What is the significance of the trade deal?

The deal is significant for both economies on multiple counts. To begin with, the announcement comes amidst a trade environment shrouded in uncertainties following U.S. President Donald Trump’s liberation day tariffs. In this backdrop, it is imperative to note that India enjoys a positive trade balance with the U.K., therefore, it is cause for enthusiasm for exporters. India was the U.K.’s 11th-largest trading partner in 2024, accounting for 2.4% of its overall trade. With the new trade deal, the British government estimates bilateral trade would increase by $34.05 billion.

The trade agreement is also of much significance to the Labour government in U.K. It is among the major trade deals ratified by 10 Downing Street since it exited the European Union. Conservative Party Prime Ministers Boris Johnson and Liz Truss had failed to facilitate its passage, notwithstanding assertions about Diwali deadlines last year.

For perspective, the two countries first made a pact to enhance their then-existing trade relationship in May 2021. Indian Prime Minister Narendra Modi and then British Prime Minister Boris Johnson had committed to doubling trade between their countries by 2030. Thirteen rounds of negotiation were held thereafter until December 2023. However, all prospects of any significant development in the realm were marred by intra-party chaos and ensuing instability for the ruling Conservatives.

It started with Boris Johnson resigning in September the same year followed by Liz Truss, who left after spearheading the government for six weeks. Thereafter, MP Rishi Sunak took over to complete the remaining tenure before he lost power to the Labour Party in July 2024. All this while the U.K. had pushed pause on the negotiations.

Things got back on track only after Mr. Modi met the Labour Prime Minister Keir Starmer on the sidelines of the G20 Summit. Thereafter, “intense” negotiations took place in February this year before the final assent on Tuesday. This was, however, with a Labour government at Downing Street and not the Conservatives who had initiated it.

What specifics do we know about the deal?

While the particulars of the deal are yet to be published, a British government release informed India will slash tariffs on 90% of products, with 85% of the overall pie expected to become “fully tariff-free” within a decade. Based on data from 2022, the U.K. estimated India could cut tariffs of more than $534 million when the deal is enforced.

On the other hand, New Delhi expects to benefit from tariffs being eliminated from 99% of its imported goods. It expects an increase in export opportunities for sectors such as textiles, leather, footwear, auto parts, engineering, as well as gems and jewellery.

It is worth noting that the British government particularly mentioned tariff benefits on whiskey and gin alongside automotive tariffs. Both sectors had found themselves on dismal shores in the U.S. President’s tariff regime. With the FTA, tariffs on alcoholic beverages entering India would be halved from 150% to 75% before they are reduced to 40% in a decade after the deal is enforced. Additionally, automotive tariffs have also been reduced from over 100% to 10%. Both would be subject to a certain quota, that is, a cap on the number of units that can benefit from the tariff rate.

The other more notable development concerns services. India has secured an exemption for Indian workers temporarily in the U.K. and for their employers from paying social security contributions for three years under the Double Contribution Convention. This is expected to ease mobility of professionals and business visitors in formal and informal sectors as IT/ITeS, financial services, professional services, alongside other business and educational services.

However, immigration was among the most contentious concerns of the U.K. government during the negotiations. Even after the deal was announced, Conservative Party MP Andrew Griffith voiced concerns about a “surge in immigration and a discount for Indian companies who choose to hire from India than the U.K.”.

What has been industry’s response?

Several sectors have exuded confidence in their exports seeing an uptick with the FTA.

Mithileshwar Thakur, secretary-general at the Apparel Exports Promotion Council (AEPC) told The Hindu that exports are expected to “grow exponentially”. Mr. Thakur explained that India’s two main competitors in the realm are Bangladesh and Vietnam. Both enjoy duty-free access to U.K. markets, which India does not. He further pointed to India being the fourth-largest supplier to the U.K. in this realm. Thus, the elimination of tariffs would bring much cheer to Indian exporters. Furthermore, the secretary-general also clarified that there was “hardly any” import from the U.K. in this sector. Thus, there was no concern about fear of competition back home.

Further, Kirit Bhansali, chairman at Gems and Jewellery Exports Promotion Council (GJEPC), in a social media post, note that their sector too would witness an uptick. He projected a rise of $2.5 billion within the next two years, thus culminating in the bilateral trade scaling $7 billion.

For perspective, a perusal of the Indian Ministry of Commerce’s TradeStat database points to pharmaceuticals, knit and non-knit apparel and electrical machinery and equipment being among the major items of export to London.

What about smaller manufacturers?

The FTA announcement has earned much enthusiasm among small-scale stakeholders. Samyukta Kisan Morcha (SKM), an assembly of Indian farmers from across the country, has apprehended as with trade treaties of the past, the latest agreement could deepen the realisation crisis in the country’s agricultural and manufacturing sectors. It held that the FTA could allow financial capital from outside to prey on the sectors.

Dinesh Abrol, adjunct faculty at the Transdisciplinary Research Cluster on Sustainable Studies (TRCSS) at JNU in Delhi, told The Hindu that trade and investment must be combined with a suitable industrial policy to ensure that competitiveness is not impacted. “There have been instances in the past (globally) where, notwithstanding a WTO framework envisaging multilateralism, import dependency grew because of unsuitable industrial policies,” he stated.

Unrelatedly, Pallavi Bakhru, partner and U.K. Corridor Leader at Grant Thornton Bharat, underlined the agriculture sector and MSMEs could be impacted since it is not easy for them to bring in capital (to upscale and compete) as large companies. However, she held, the paradigm may be the “tug” of companies to become competitive.

“If you look at the U.K., the bulk of the industry is MSME, and it is not MSMEs (in both countries) are subpar in terms of the products they make, they are of international standards,” she stated, adding that the government may also come up with policies to protect them.

Agneshwar Sen, Trade Policy Leader at EY India further said that FTAs by their very nature create a mutually beneficial enabling environment. “A country like the U.K. would come with their technological know-how, this with our advantage of skilled manpower, would create efficiencies that would diffuse within the larger economy, creating globally competitive companies. Thus, the technological injection would lead to investment as well,” he held.

What are the other concerns?

Potential concerns emanate on two fronts, namely the Carbon Border Adjustment Mechanism (CBAM) and the absence of an Investor-State Dispute Settlement (ISDS). According to British govt data, India had received about $23.3 billion from the U.K. as Foreign Direct Investment (FDI), and the U.K. received about $17.5 billion in return in 2023. This paradigm expected to further escalate would not potentially have a dedicated investor protection forum or the ISDS.

As for CBAM, it would impose a “carbon price” on goods emitting greenhouse gases that are being imported into the country. The FTA, in its current form, is understood to have no provisions to counter this potential threat. Thus, there emanates a paradigm where Indian goods, as steel and aluminium, face levies whilst British goods of the same threat enter India without any duty being imposed — creating an imbalanced equation.

Although unrelated to the U.K., it is worth noting that Mr. Goyal also warned on Tuesday that India would retaliate with likewise taxes should Europe go ahead with the carbon pricing mechanism. All in all, a cause for potential uncertainty.

Lastly, the British government underlined that the FTA would give them access to compete for public procurement (that is, the purchase of services and goods by the government or state-owned entities). It held that suppliers across the Northern Sea would be able to “bid for many of these contracts, on better terms and with greater access to the relevant information to support their bids”. Mr. Abrol held this could potentially culminate in growing import dependency.

(£1 = $1.33)