FTA with the UK can weave magic

By Abhishek Kumar & Divya Srinivasan

UK PM Boris Johnson was recently in India to negotiate a free trade agreement (FTA). Trade with the UK holds colossal importance in India’s colonial history. Consequent to the East India Company’s focus on textile trade—increased import from India that soon became a threat to the domestic textile industry in England—the British parliament invoked protectionist measures in the form of the Calico Acts (1700, 1721) that banned the import of most cotton textiles into England. This economic protectionism was primarily motivated by India’s, especially unpartitioned Bengal’s, hegemony over the global cotton textile markets at the time. British parliament repealed the Calico Acts in 1774, once they established the competitiveness after the invention of the power looms. India, therefore, became largely an exporter of raw materials instead.

Fast forward to the 2010s, India has been witnessing diminished competitiveness in textile trade vis-à-vis Bangladesh which shares a similar colonial legacy. One can get a sense of this relative decline in India’s competitiveness by looking at the proportion of our raw cotton exports to Bangladesh out of total cotton exports. World Trade Organisation data suggests that, between 2003 and 2010, India exported 10.4% of its total cotton exports to Bangladesh. During 2011-2015, this increased to 16.6%—to 27.6% during 2016-2021. Bangladesh is increasingly buying more and more cotton from India and adding value to that by using labour-intensive manufacturing and exporting to the West.

The textile exports from Bangladesh to the EU (including the UK) and the UK surpassed the exports to these two markets from India in 2011 and 2012, respectively. In 2019, the export of textiles from Bangladesh to the EU and UK became 2.5 and ~2 times the exports of textiles from India. Higher exports have brought significant economic benefits to Bangladesh and has contributed to increasing growth differences between the two countries. World Bank data suggest that between 2011-19 the average growth rate in Bangladesh was almost 0.5% higher than that of India, increasing to more than 1% between 2016-2019.

India’s diminished competitiveness is due to Bangladesh’s preferential access to Western markets. Large exports from Bangladesh attract very low tariffs as Bangladesh is part of the everything but arms (EBA) agreement. Member-countries of this agreement have the highest amount of tariff-free access to Western markets. The only big Western market that does not offer such preferential access to Bangladesh is the US. The benefits of this preferential access to the markets are significant. Bangladesh’s ~3% market share in the EU textile imports in the early 2000s has increased to ~14% at present, whereas the same 3% market share in the US has increased marginally to 6-7% during the same period. Although India is also a member of the general system of preferences (GSP) agreement, the tariff-free access is limited vis-à-vis the EBA agreement.
A report from European Commission suggest that the GSP eligibility for India is almost a third of Bangladesh’s. With relatively higher import duties, India loses competitiveness in these external markets vis-à-vis our neighbour.

The restricted market made India a raw material exporter in textiles sector in the past, and this is happening again. Even though Bangladesh is set to graduate from its current least developed country status, and will have to give up some advantages under the EBA agreement, other least developed countries can take that market due to preferential access.
To summarise, in labour-intensive manufacturing, least developed countries with cheap labour will hurt India’s market access either now or later due to the preferential access granted to them. India’s dream to transform itself into a manufacturing hub that will bring quality jobs will remain elusive.

Therefore, the trade deal with the UK becomes very important for India as the UK has been one of the key markets of our textiles, and this will pave the way for a similar agreement with the EU. These trade agreements are important for promoting labour-intensive manufacturing such as textiles and generating high-quality jobs. Efficient reaping of India’s demographic dividend hinges on the development of the manufacturing sector. This free trade agreement is our finest opportunity to bring reasonably paid jobs to the vast majority who have still not seen the fruits of economic growth, and we must not fail them.

The authors are associate fellow and research analyst, CSEP, respectively.