India-UK FTA: PM Modi, Sunak reaffirm commitment—benefits, bottlenecks, and other key insights on the pact

A file photo of Prime Minister Narendra Modi with his British counterpart Rishi Sunak.

The window to finalise negotiations with the United Kingdom (UK) on a Free Trade Agreement (FTA) before the Election Commission’s Model Code of Conduct (MCC) takes effect is rapidly closing, prompting top leadership from both countries to intensify efforts to resolve outstanding issues. Notably, the MCC is set to be enforced on the day the Lok Sabha poll schedule is announced. With Lok Sabha elections expected to occur before June 16, coinciding with the end of the term for the 17th Lok Sabha, the MCC serves as a guidebook for election conduct, including specific guidelines for the actions permissible for the ruling party.

Modi, Sunak Discuss Bilateral FTA Progress

Against this backdrop, Prime Minister Narendra Modi held discussions with his British counterpart Rishi Sunak on March 12. They welcomed the progress made in ongoing discussions and reiterated their commitment to strengthening the bilateral Comprehensive Strategic Partnership. Additionally, both leaders expressed their determination to work towards an early conclusion of a mutually beneficial FTA.

In a post on X, Modi said, “Had a good conversation with PM @RishiSunak. We reaffirmed our commitment to further strengthen the bilateral Comprehensive Strategic Partnership and work for early conclusion of a mutually beneficial Free Trade Agreement.”

Also Read | Modi, Sunak reaffirms commitment to conclude India-UK FTA talks at the earliest

The bilateral trade between India and the UK saw a significant uptick, reaching $20.36 billion in 2022-23, up from $17.5 billion recorded in the preceding fiscal year 2021-22.

India's FTA with European Nations

More importantly, the FTA talks between the two leaders occurred just two days after New Delhi signed FTA with a group of European nations, including Switzerland, Norway, Iceland, and Liechtenstein. This agreement involves a shared commitment to reducing tariffs, with New Delhi also welcoming an expected flow of $100 billion in investments over the next 15 years.

Strengthening Economic Ties and Relations

In the last two years, India has forged significant trade agreements with Australia and the United Arab Emirates (UAE). These agreements mark important milestones in New Delhi's efforts to enhance its economic ties and foster closer relations with key trading partners.

Also Read | FTA possible before India elections, says UK trade minister

The trade deal with Australia opens up new avenues for cooperation and collaboration between the two nations, spanning various sectors such as agriculture, technology, and energy. Likewise, the trade pact with the UAE strengthens India's trade relations with a key partner in the Gulf region.

What is a Free Trade Agreement (FTA)?

A free trade agreement is a formal agreement between two or more countries with the aim of removing barriers to trade in goods and services between them. The primary objective of an FTA is to facilitate smoother trade relations by eliminating or reducing tariffs, quotas, and other restrictions on imports and exports. It allows participating countries to offer preferential trade terms and tariff concessions to each other, thereby promoting increased economic activity and fostering closer economic ties.

Additionally, FTAs often include provisions addressing various aspects of trade, such as intellectual property rights, investment rules, and dispute resolution mechanisms, to further facilitate trade between the signatory nations.

Why does India Need FTA?

New Delhi pursues FTAs for several reasons, primarily focusing on expanding and diversifying its export markets. By negotiating FTAs, India aims to lower trade barriers, such as tariffs and quotas, which can impede its exports and limit access to foreign markets. Additionally, FTAs offer opportunities for cheaper access to raw materials and intermediate goods, which can boost the competitiveness of Indian industries.

Also Read | India-UK FTA — A political imperative or an economic necessity?

Furthermore, FTAs can attract foreign investment by providing a more favourable trade environment and access to larger markets. This can stimulate economic growth, create jobs, and foster technological advancement within India.

In addition to FTAs, India has also pursued preferential trade agreements (PTAs), which focus primarily on reducing tariffs on trade in goods. While FTAs are comprehensive in nature, covering various aspects beyond trade in goods, PTAs seek tariff elimination with a margin of preference.

Significance of FTAs

Free trade agreements hold considerable importance for member countries due to several reasons:

(1) Resource Optimisation: FTAs encourage businesses to specialise in producing goods that best utilise their resources, while importing goods that are scarce or unavailable domestically. This leads to efficient allocation of resources and enhanced productivity.

(2) Increased Trade: FTAs boost the production and consumption of internationally traded goods by reducing trade barriers, resulting in lower costs and expanded trade volumes.

(3) Economic Growth: By facilitating a blend of local production and foreign trade, FTAs contribute to economic growth and development. This mix allows economies to capitalise on comparative advantages and expand their markets.

(4) Supply Chain Diversification: FTAs promote diversification of supply chains by streamlining cross-border business operations, making it easier and more cost-effective for businesses to engage in international trade.

(5) Support for SMEs: FTAs benefit small and medium-sized enterprises (SMEs) by lowering trade barriers, enabling them to access new markets and export their goods and services.

Additionally, FTAs provide SMEs with access to new technologies and innovations.

(6) Consumer Benefits: Consumers in member countries experience improved variety and affordability of products due to increased competition and access to a wider range of goods through FTAs.

(7) Encouragement of Foreign Direct Investment (FDI): FTAs create a conducive environment for foreign direct investment, leading to increased capital inflow, job creation, and technology transfer.

(8) Monopoly Elimination: FTAs contribute to the elimination of monopolies by promoting competition and market openness, which benefits consumers and promotes innovation.

Gains for India in the proposed FTA

Revival of Labour-Intensive Sectors: Labour-intensive sectors such as apparel and gems and jewellery have witnessed a decline in market share over the past five years. A trade deal with the UK could help reduce tariffs on Indian textile exports, which currently face barriers as high as 10 percent. Also, it could level the playing field with competitors like Bangladesh and potentially revive Indian textile exports.

Competitiveness Boost: Granting zero-duty access to Indian textiles under the FTA could enhance India's competitiveness in the UK market. By aligning tariffs with competitors, India would have a better chance to regain market share and expand its exports.

Notably, concerns have been raised about the potential impact of granting zero-duty access to Indian textiles on Least Developed Countries (LDCs) such as Bangladesh.

Also Read | Majority of India-UK FTA issues either closed or at advanced stage of talks: Official

Challenges in India-UK FTA

Several critical topics under consideration in the agreement include reductions in customs duties on electric vehicles and whiskey, as well as facilitation of professional mobility. India and the UK started discussions for a FTA in January 2022.

(A) Agreement on Rules of Origin (ROO): India is advocating for stringent ROO to ascertain the national source of products. This stance stems from concerns regarding potential dumping of European alcoholic beverages, such as gin, vodka, and Irish whiskey, into India through the UK.

(B) Work Permits for Indian Service Sector Workforce: New Delhi is seeking relaxation in the UK's stringent work permit policy for foreigners, particularly in the service sector, post-Brexit.

(C) Carbon Tax: The UK's proposed carbon tax on metal imports, akin to the EU's carbon border adjustment mechanism (CBAM), poses a challenge to Indian manufacturing sectors such as cement, iron and steel, and glass.

(D) Intellectual Property Rights (IPR): The UK is advocating for a robust IPR regime, particularly in sectors such as life sciences, where it leads in innovation. India, as the world's largest manufacturer of generic drugs, opposes stringent IPR regulations, particularly in the medical sector.

(E) Protection of Domestic Industries: India seeks to safeguard its domestic alcohol bottling industry from intense competition posed by UK beverage companies within the FTA framework.

India-UK FTA: A Milestone in New Delhi's Economic Ambitions

India's potential trade agreement with the UK marks a significant milestone, showcasing New Delhi's ambitious efforts to position itself as a premier investment destination. This move highlights India's growing appeal to investors seeking to diversify their supply chains and reduce dependence on China.

New Delhi's proactive approach in enhancing ties with key trading partners underscores its vision of becoming a prominent manufacturing hub. This strategic move aims to harness India's vast workforce and create employment opportunities for the millions of young individuals entering the job market annually.

India-UK FTA Talks: Challenges Persist

The UK government views a free-trade agreement with India, the world's fastest-growing major economy, as a significant post-Brexit achievement. However, talks, initially aimed to conclude by October 2022, have encountered several challenges. Disputes have arisen over a range of issues, including visas for Indian workers and students, as well as market access for UK producers of whisky and premium cars.