UK India

UK, India eye ‘interim agreement’ as FTA negotiations launch

The United Kingdom is set to formally launch FTA negotiations with India next week, knowing that political and economic sensitivities on either side are likely to put limitations on the scope of the final accord.

This is clear from analysis of a strategy paper published by the Department for International Trade which sets out the case for a deal.

Both London and New Delhi have openly signalled that they will “consider the option of an Interim Agreement that generates early benefits for both countries” – a sure sign that the two governments expect progress on the main body of the FTA to be slow and hard-fought.

The UK’s strategy paper and accompanying economic scoping assessment were published to coincide with a high-profile meeting in New Delhi between UK international trade secretary Anne-Marie Trevelyan and her Indian counterpart, Piyush Goyal.

“India and the UK will seek to agree a mutually beneficial agreement supporting jobs, businesses and communities in both countries,” the two trade ministers said in a joint statement.

Political and strategic gains

For the UK, the negotiations with India are of political and strategic importance as well as bringing potential economic benefits.

“A UK-India agreement would help to put Global Britain at the heart of the Indo-Pacific region, an area representing over 40% of global GDP and containing some of the world’s fastest growing economies,” the DIT strategy paper says.

“As these economies expand, it is key that the UK has access to their markets … Tilting towards the Indo-Pacific will also help diversify our trade, make our supply chains more resilient and make the UK less vulnerable to political and economic shocks from around the globe.”

The most obvious targets for London are reductions in India’s often very high tariffs on imports of goods such as cars, whisky, electrical goods and pharmaceuticals.

But India is reluctant to reduce levels of protection on sensitive products, especially agri-food goods. The Indian government withdrew from the pan-Asian Regional Comprehensive Economic Partnership in 2020 because of its unwillingness to accept the lower tariffs implied by that deal.

However, an FTA could also protect British exporters against possible further increases in applied Indian tariffs, as the DIT paper explains.

“UK exports face an average 18.7% tariff [in India] in 2021 and this has increased from 13.4% in 2016. India has been raising tariff levels towards their ‘bound’ maximum, set by WTO Most Favoured Nation levels. However there is still significant room for further increases, with a 30-percentage point difference between applied and bound rates,” it observes.

Visa issue likely to dominate discussions on services

Services account for 46% of total UK exports to India, and the UK scoping assessment notes that India currently has high barriers to market access in sectors where the UK has considerable strength, such as accountancy, architecture and law.

But India too has ambitions for its services sector, and it has made clear that one of its key asks will be improved access to visas for Indian nationals coming to work or study in the UK. This represents a challenge for a UK government which is heavily focused on controlling immigration.

Any services deal, says DIT’s objectives paper, must “continue to preserve the integrity of the UK’s domestic immigration system”.

In an interview with the Financial Times on Thursday, Trevelyan stated that “everything is on the table to discuss” – including the visa access issue.

The area of digital trade will see the UK – a self-declared champion of open markets – pitting itself against an Indian government which at WTO level is continuing to resist even initiatives like making permanent the current moratorium on e-commerce duties.

The UK’s stated objectives in this area are to “seek commitments on free and trusted cross-border data flows, prevent unjustified data localisation, and maintain the UK’s high standards for personal data protection”.

Modest boost to UK’s economic output

According to the UK’s analysis, a UK-India trade deal could boost UK gross domestic product by between 0.12% and 0.22% by 2035, depending on the scope of the agreement.

This would be a more substantial gain than is forecast for either of the FTAs agreed by the UK so far, with Australia (a GDP gain of 0.08%) or New Zealand (a marginal GDP impact).

It would however pale into insignificance compared with the longer-term economic impact of the UK leaving the EU single market last year, which a UK government advisory body has estimated to be a loss of around 4% of GDP.

Following the inaugural round of negotiations next week, negotiators from the UK and India will meet “approximately every five weeks”, according to the joint UK-Indian statement.

Trevelyan told the Financial Times that her aim was to secure a trade agreement with India “by early 2023” – although this might be a more realistic aspiration for the ‘early harvest’ interim agreement to which both sides have said they are open.

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