Recent developments suggest that India and the United Kingdom (UK) are on the verge of finalizing their bilateral free trade agreement (FTA) in a relatively short period of time, less than two and a half years after Prime Minister Narendra Modi and then-prime Minister Boris Johnson signalled their intent to negotiate such an agreement as part of the Enhanced Trade Partnership. If the agreement is signed before the end of 2023, it will mark the second-fastest FTA to be concluded by India, surpassed only by the UAE agreement, which was finalized in under six months.
Several factors have driven the two nations to engage in negotiations for the FTA. India’s motivation stems from the consistent decline in the UK’s significance as a trading partner, particularly since the early 2000s. At that time, the UK accounted for 5.8% of India’s total trade, ranking as the second-largest partner. However, within a decade, this share dwindled to 2.3%, and by 2021, it had further dwindled to a mere 1.7%, compelling India to seek a mutually beneficial FTA with the UK.
The UK’s Department for International Trade (DIT) emphasized the potential of an India-UK FTA in its Strategic Approach. It recognized the wide range of mutual interests, such as life sciences, science, technology, and services, where significant economic benefits could be derived. Addressing barriers to trade, particularly high tariffs with India, was also a key objective for the UK. Furthermore, the FTA presented an opportunity for the UK to solidify its position as a major trading power after Brexit.
However, as negotiations unfolded, differences emerged between the two nations on various fronts, some of which remain unresolved. Crucial issues such as tariff reductions, digital trade and data flows, government procurement, labour and environmental standards, and intellectual property rights became contentious points of discussion. The UK initially sought to incorporate higher standards of intellectual property protection in Indian laws. However, the reliance of the UK’s National Health Service (NHS) on India’s generic medicines might hinder efforts to push for changes in India’s Patents Act.
In bilateral FTAs, such as the one between India and the UK, the issue of India’s relatively higher tariffs has been highlighted as a significant concern. A recent report from the House of Commons, released in April of this year, pointed out that while 60% of Indian exports entering the UK are already exempt from tariffs, only 3% of UK exports to India enjoy the same benefit. On average, UK exports to India faced tariffs of almost 15% in 2022, whereas Indian exports were met with an average tariff of approximately 3% in the UK.
Concerning tariffs, there are notable disparities between the two countries, primarily affecting the automobile products, alcoholic beverages, and milled rice sectors. The UK has urged India to reduce its tariffs on passenger cars, ranging from 70-100% depending on engine capacity, and has emphasized the need for an expedited reduction process. However, tentative signals indicate that India may be willing to lower tariffs to around 75%. Another hindrance, according to the UK, is India’s Customs Administration of Rules of Origin (CAROTAR), which could potentially limit market access for British automobile manufacturers in India. These manufacturers argue that the application of CAROTAR would adversely impact their interests due to their heavy reliance on global supply chains.
The removal of India’s 150% tariff on alcoholic beverages is equally important for the UK. Initially, the UK aimed for a halving of the tariffs upon the implementation of the Free Trade Agreement (FTA), with a further reduction to 30% over three years.
However, India proposed to reduce the tariffs to 100% initially, and then gradually decrease them to 50% over the course of a decade. Similarly, India is interested in gaining increased access to the UK market for milled rice, by eliminating the tariffs currently imposed by the UK.
The UK Rice Association, which represents the processing industry, suggests expanding the range of tariff-free access for un-milled basmati rice varieties, as well as implementing tariff rate quotas for other kinds of brown rice.
Both countries recognize the significance of digital regulations amidst the growing digitalization of economies. Key aspects such as the free and trusted cross-border flow of data, data localization, and requirements for the transfer of source codes and algorithms are crucial for both nations. India’s emphasis on maintaining certain boundaries in these areas highlights the importance of these regulations within the country’s framework.
The UK, hosting major pharmaceutical companies such as GlaxoSmithKline and AstraZeneca, initially aimed to modify India’s Patents Act to support the growth of its generic firms.
However, this clashed with the interests of the NHS, which relies on affordable generic medicines from India. Eventually, the Department for International Trade (DIT) appears to have prioritized protecting the NHS by stating they will not accept any provisions that increase medicine costs for the healthcare system. This stance suggests that the UK may withdraw its pressure for amending India’s patents act.
Moreover, one noteworthy aspect of the UK’s signed Free Trade Agreements (FTAs) is the inclusion of international labour standards, requiring partner countries to enforce the International Labour Organization’s (ILO) Fundamental Conventions. Here, the UK and India have disagreed, as India has not ratified the conventions on freedom of association and collective bargaining due to its adoption of flexible labour market policies.
This creates a challenging situation for India as industry leaders have advocated longer working hours than permitted by the ILO, while the UK’s businesses and trade unions insist on strict adherence to ILO standards.
Additionally, India has always pushed for enabling provisions in FTAs to facilitate the temporary movement of professionals, but the UK government appears less inclined to open its borders. Furthermore, India is keen on including a social security agreement within the FTA, which would benefit Indian professionals working in the UK for a short period.
