India-UK FTA - A New Opportunity

This editorial is based on “India Calling with Quite A Lot Of Trade in Mind” which was published in The Hindu on 05/02/2022. It talks about the significance of the formal Free Trade Agreement (FTA) negotiations initiated by India and the UK.

For Prelims: Free Trade Agreement (FTA), Types of FTAs, India’s FTAs with different countries, India-UK Ties, Post-Brexit Trade Treaty.

For Mains: India’s Bilateral Relations with UK, India-UK Free Trade Agreement and its significance for India, Free Trade Agreements.

The beginning of the year 2022 saw the formal launch of negotiations for an India-United Kingdom free trade agreement (FTA) which both of them envisage concluding by the end of 2022.

These negotiations were aimed at achieving a “fair and balanced” FTA and cover more than 90% of tariff lines so as to reach the bilateral trade target of around $100 billion by 2030.

Besides goods, services and investments, this ‘new-age FTA’ has been suggested to include areas such as intellectual property rights, geographical indications, sustainability, digital technology and anti-corruption.

A U.K.-India trade agreement will stimulate growth and employment in both countries and will help diversify supply chains by making it easier and cheaper for more businesses to do business across borders.

India and Free Trade Agreement (FTA)

What is an FTA?

• A Free Trade Agreement (FTA) is a pact between two or more nations to reduce barriers to imports and exports among them.
• Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
• The concept of free trade is the opposite of trade protectionism or economic isolationism.
• FTAs can be categorised as Preferential Trade Agreement (PTA), Comprehensive Economic Cooperation Agreement (CECA), Comprehensive Economic Partnership Agreement (CEPA).

Where does India stand in terms of FTAs with Other Countries?

• India has been demonstrating a new seriousness of purpose as it negotiates 16 new and enhancing several other trade pacts with nations as diverse as Canada, the US, the European Union and South Korea.
• India is hoping to conclude its first FTA in over a decade with the United Arab Emirates in 2022. And another one with Australia is also in the offing.
• Right before the launch of FTA talks with the U.K., India and South Korea also decided to expedite the upgradation of the existing FTA, formally called the Comprehensive Economic Partnership Agreement.

India-UK FTA

Where do India and the UK currently stand in terms of Economic Ties?

• There are nearly 600 U.K. companies in India employing more than 3,20,000 people.
  • Products manufactured in India, by companies like JCB and Hindustan Unilever, are exported to over 110 countries across the globe supporting the vision for an Atmanirbhar Bharat.
• Also, India is already a big investor into the U.K., especially in dynamic sectors such as fintech, electric vehicles and batteries.
  • In 2020-21, India was the U.K.’s second largest source of investment in terms of number of projects.
• However, given the size of the two economies — the fifth and sixth largest in the world — India-UK trade relationship in particular has underperformed. An FTA will change that.

What Significance does this FTA hold for the UK?

• The UK has made a trade pact with India, one of its post-Brexit priorities as it seeks a greater role in the Indo-Pacific.
  • India is at the heart of the U.K.’s Indo-Pacific ‘tilt’, which has generated considerable interest around the world.
• While the U.K. will also be launching trade negotiations with Canada, Mexico and the Gulf to underscore its ‘Global Britain” credentials, a trade deal with India along with its membership in the CPTPP remains critical in anchoring the U.K. economically to the Indo-Pacific.
• The U.K. recognises the importance of a free and open Indo-Pacific to global stability and prosperity, and has made clear its intentions to deploy strategic assets to this end.
  • Partnerships like AUKUS and FTAs with countries like India gives London a greater voice in the Indo-Pacific region.

How Significant is this FTA for India?

• Trade deals with the UK could boost exports for large job-creating sectors such as textiles, leather goods, and footwear.
  • India is also expected to register a quantum jump in the export of Marine Products through the recognition of 56 marine units of India.
• There is also great potential for increasing exports in service sectors like IT/ITES, Nursing, education, healthcare, including AYUSH and audio-visual services.
• The UK is a permanent member of the UN Security Council, and one of the strategic partners of India.
  • Strengthening bonds with the trade would seek UKs support at global issues like standoff with China in the Ladakh sector of the Line of Actual Control (LAC) and claim for permanent seat at UNSC.

What can be the Underlying Challenges?

• Delays in Signing FTAs: Interim agreements, which reduce tariffs on some products, can however in some cases lead to significant delays in achieving comprehensive FTAs.
  • India, in 2004, signed an interim trade agreement with Thailand to reduce tariffs on 84 goods, but the agreement was never converted to a full-fledged FTA.
• Possible Challenges WTO may Pose: Interim FTA do not graduate into full FTAs can also face challenges from other countries at the World Trade Organization (WTO).
  • The WTO rules only permit members to give preferential terms to other countries if they have bilateral agreements that cover “substantially all the trade” between them.

What is the Way Forward?

• Towards Stronger Indo-UK Ties: Through its Indo-Pacific tilt, the U.K. is finally carving out a direction and purpose to its post-Brexit foreign policy. And it is this prioritisation that has opened up a new window for New Delhi and London to quickly finalise their FTA.
  • India is showing a newfound flexibility in engaging with its partners on trade. Moreover, strategic partnerships without strong economic content would have no meaning in the Indo-Pacific, where China’s economic clout is growing by the day.
  • It is a unique “now or never” moment and the two sides seem willing to seize it despite the challenges.
• Opportunities for India: India has an extraordinary opportunity to transform its economy and society in the next 30 years.
  • Freer trade with the U.K. will help through greater access to a highly open and competitive market, offering valuable opportunities for India’s booming companies — for example giving Bengaluru’s start-ups direct access to London’s capital markets.
  • Lower barriers coupled with greater regulatory certainty would incentivise new small and medium-sized enterprises to export their goods and services.

Drishti Mains Question

Discuss the importance that the launch of formal Free Trade Agreement (FTA) between India and UK holds for the two countries.