Sara Joy and Alfiya Ansari
With multilateralism yielding limited results in the recent times, India is in the race to conclude a series of bilateral trade agreements with the United Kingdom, Australia, Canada, Israel, and the European Union. Amidst this, the third round of India-UK FTA negotiation is due.
The interim agreement would serve as a frontrunner to clinching a more comprehensive FTA between the fifth- and sixth-largest economies in the world. The total trade between India and the UK stood at $24 billion in 2020, with investment of $31.4 billion in the last two decades.
India is claimed to be a high-import tariff jurisdiction, however it is interesting to note that 94 percent of India’s imports from the UK face tariff of less than 13.5 percent. Major exception being ‘beverages, spirits and vinegar’ category with tariff of 107.6 percent, and constituting 2.6 percent of the total imports.
Around 80 percent of this above-mentioned 2.6 percent is of scotch whiskey, with a tariff of 150 percent. British-made cars also face tariff of 125 percent. These two items are a major point of contention, and in the ongoing FTA negotiations, London seeks to bring down these tariffs. It would also be negotiating for better access to India’s agriculture, and value-added dairy product market.
In comparison, more than 98 percent of India’s exports to the UK fall within 12 percent effectively applied tariff with higher tariffs on processed food and tobacco products. However, India would also be expecting greater access for its textiles and garments, and engineering goods in the UK market.
Consequently, in case of an FTA, India will have to give greater concessions through tariff cuts, which are relatively higher than the UK whose tariff levels are already low. But without any doubt, India’s total trade with the UK will rise ahead of the FTA. Considering that both countries are major services exporters, there lies an underlying opportunity for both to align their interests, and act in complementarity. This will further boost ties and help them become the world leaders in the services exports.
A preliminary study conducted by India Exim Bank estimated that under certain assumptions in the model, a preferential trade agreement between India and the UK could result in rise of India’s imports by $2.3 billion, with an expected net revenue loss of $385.7 million. India’s exports could rise by $245.1 million with an expected net revenue loss of $110.5 million to the UK. With imports acting as inputs for the exported products, cheaper imports also reduce the cost of exports, thus making it more competitive in the international market.
India could promote investments from the UK by allowing its services suppliers to establish operations in India, and collaborate with Indian companies, thus adding to its competence in the global market. India’s insurance and banking sectors are of particular interest to the UK. India should leverage its position to further facilitate movement of people and provide the much-demanded social security agreement to the Indians in the UK.
Similarly, Indian manufacturers could gain from the UK’s advanced technical know-hows in the renewable energy and electric vehicle sectors. Both countries need to strike a mutually-beneficial, comprehensive agreement comprising goods and services, investment, and movement of people.
Considerations In Negotiations
While negotiating a comprehensive FTA, instead of concentrating only on list of products for tariff concessions, the focus should be on the products in the sensitive/negative list on which tariff concession would be limited to protect the interest of the sector. India should seek to reduce the non-tariff barriers faced by Indian exporters like in the case of the dairy sector. This necessitates both countries to work towards drawing up ‘Mutual Recognition Agreements’.
Like the India-UAE CEPA, a stringent rule of origin should be included to guard against duty-free imports of transhipped products along with a permanent bilateral safeguard mechanism to deal with any sudden surge in imports. The FTA also needs to address the inverted duty problem to ensure that raw materials have lower duties, except for any sensitive items — this will further help India move up in the global value chain, and boost Make in India through promoting manufacturing in India.
Sara Joy and Alfiya Ansari are economists with India Exim Bank. Views are personal, and do not represent the stand of this publication.