Recent developments indicate that India and the United Kingdom (UK) are close to finalising their bilateral free trade agreement (FTA) less than two and a half years after prime minister Narendra Modi and then-prime minister Boris Johnson had given their green signal to negotiate such an agreement as part of a wider Enhanced Trade Partnership. If the agreement is signed before the end of 2023, it would be the second-quickest FTA to be concluded by India, next only to the one with the UAE that was finalised in less than six months.
A number of factors have encouraged the two countries to negotiate the FTA. The most compelling for India was the fact that the UK’s importance as a trade partner had consistently diminished since the turn of the millennium. In 2000-01, UK’s share in India’s total trade was 5.8%, making it the second largest partner. Within a decade, UK’s share declined to 2.3%, and when the decision to negotiate the FTA was taken in 2021, this figure was 1.7%.
In its Strategic Approach to India-UK FTA, the UK’s department for international trade (DIT) stated that an FTA with India offered “high economic potential across a wide range of key sectors of mutual interest, including life sciences, science, technology, and services”. The UK also saw the FTA as an opportunity to address the issue of significant barriers to trade with India, including high tariffs. The FTA with India offered an opportunity to meet UK’s aspirations to establish itself as a major trading power in the post-Brexit phase.
However, as negotiations proceeded, differences emerged between the two countries on several key issues and some of them remain. Tariff reductions on key products have been difficult to resolve, as have been issues related to digital trade and free flows of data. Other contentious issues in the negotiations are government procurement, labour and environmental standards, and digital trade. The two countries began with radically different positions on the issue of intellectual property rights, with the UK insisting incorporation of higher standards of protection in Indian laws. But the dependence of UK’s National Health Service (NHS) on India’s generic medicines may prevent it from pushing for amending India’s Patents Act.
As in most bilateral FTAs, India’s relatively higher tariffs were flagged as a major area of concern. A House of Commons reported in its report in April this year that while 60% of Indian exports to the UK are already tariff-free, only 3% of UK exports to India are. Average tariffs faced by UK exports to India was nearly 15% in 2022, while India’s exports, on an average, faced about 3% tariffs in the UK.
On the issue of tariffs, there are major differences between the countries in three sectors, automobile products, alcoholic beverages, and milled rice. The UK has demanded reduction of India’s tariffs on passenger cars, which range from 70-100%, depending on the engine capacity and has insisted that the tariff reduction must be fast tracked. But indications are that India may agree to reduce to reduce tariffs to 75%. An additional problem, which, according to the UK could limit its market access in India for automobiles is India’s rules of origin, namely, the Customs Administration of Rules of Origin (CAROTAR). British automobile manufacturers have argued that given their extensive dependence on global supply chains, application of the CAROTAR would adversely affect their interests in India.
Equally important is the UK’s interest in removing India’s 150% tariff on alcoholic beverages. The UK has been seeking halving of the tariffs when the FTA became effective, followed by a sharp cut in tariffs to 30% over three years. However, India is willing to reduce tariffs initially to 100% and to then reduce them to 50% over a decade.
India, too, is seeking increased market access in milled rice through removal of the tariffs that the UK currently imposes. The UK Rice Association, which represents the processing industry, has argued that the UK should extend the list of varieties of un-milled basmati rice allowed tariff-free access to its market, besides granting tariff rate quotas for other types of brown rice.
Digital regulations are significant, considering the increasing digitalisation of economies. Addressing issues like free and trusted cross-border data flows, data localisation, and transfer requirements for source codes and algorithms have been critical for both countries. India’s insistence on maintaining red lines in these areas reflects the significance of these regulations in the country’s framework.
Home to some of the world’s largest pharmaceutical companies like to GlaxoSmithKline and AstraZeneca, the UK had initially sought changes in India’s Patents Act, targeting provisions that facilitate growth of its generic firms. However, this position ran contrary to the interests of the NHS, which sources cheap generic medicines from India. Eventually, the DIT seems to have decided to protect the interests of the NHI and argued, “we will not accept any provisions that would increase the cost of medicines for the NHS” and emphasising that “our commitment to this will not change during our negotiations with India”. Does this imply that the UK will withdraw its pressures for amending India’s patents act?
One of the features of the FTAs signed by the UK is the inclusion of international labour standards, which commit partner countries to enforce ILO’s Fundamental Conventions. The UK and India have differed on this issue as the latter has not ratified the Conventions on freedom of association and collective bargaining, in view of its decision to adopt flexible labour market policies. This leaves India in a piquant position since the captains of the industry have advocated longer working hours than prescribed by the ILO, as was reiterated forcefully recently, while businesses and trade unions in the UK has insisted on strict adherence to the ILO norms.
India has always insisted on inclusion of enabling provisions in FTAs aiding temporary movement of professionals, but the British government seems less inclined to open its borders. Alongside, India is keen that a social security agreement with the UK is included in the FTA, which would benefit Indian professionals working in the country for a short period.
Biswajit Dhar, Distinguished professor, Council for Social Development