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So near and yet so far: India, UK make last ditch attempt ahead of polls to sign trade deal

Of India’s merchandise imports from the UK of $8.96 billion in FY23, over 90% attracted average-to-high tariffs. The highest tariffs are on cars at 100% and on Scotch whisky and wines (150%).

The ongoing visit of an Indian delegation led by commerce secretary Sunil Barthwal to the UK marks the last ditch effort to sew up a free trade agreement (FTA) before the two countries get into election mode. 

While negotiations began two years ago, several informal deadlines haven’t been met; every time it looked like a deal was around the corner, differences cropped up. 

Ahead of the visit, the team is understood to have received directions from the Prime Minister’s Office (PMO) on further steps. PM Narendra Modi is believed to be keen to conclude the deal before the model code of conduct (MCC) for the general elections, expected by mid- or late March, comes into force. London may be equally enthusiastic as speculation is rife  that Modi’s counterpart Rishi Sunak could call for early elections in May, even though the current term of UK Parliament ends only in December. However, senior officials believe the MCC won’t come in the way of a deal being signed since it is an ongoing negotiation. 

While the proposed FTA may not be an election issue in India, it is certainly so in the UK, both for political and economic reasons. According to the 2011 Census of England and Wales, there were 1.4 million people of Indian origin residing in the UK, accounting for 2.5 % of the overall population. The last British election saw 15 Indian-origin members of Parliament elected. Many of them held high profile positions in the Cabinet and, and even Sunak is of Indian descent. 

Also, with its faltering economy, the UK is keen to access the Indian market for assorted goods and services and ease two-way investment flows. For London, which opted out of the European Union, an FTA with New Delhi is an attempt to realign its ties with the world. Immediate politics aside, the trade agreement will be an important milestone for India and a statement for the UK establishment. India has signed 13 FTAs so far with countries and regional blocs.  This means that India trades on preferential terms with 21 countries as of now. None of these pacts are with the ‘developed west’. 

Officials admit the UK FTA is the “most complex one” they have negotiated so far. For New Delhi, the India-UK FTA could also serve as a template for the proposed trade agreement with the European Union (EU), its second-largest trade partner.

To be sure, it is a new-age FTA that goes beyond the simple give-and-take of tariff cuts in goods and services trade.  The 26 chapters of the FTA deal with IPR, government procurement, sanitary measures, technical barriers to trade, competition, rules of origin, trade facilitation etc. Labour, gender and digital trade are also part of the agenda. 

India is seeking tariff cuts for its traditional exports like textiles, leather, agri products. The UK has its developing country trading schemes that allow duty-free and quota-free access to 47 countries, which are in direct competition with India in these sectors. With lower duties of around 4-10%, the tax advantage that the least developing countries currently get in the UK market, vis-a-vis India, will go. According to a study by Global Trade Research Initiative, of the $11.41 billion Indian goods exported to the UK in FY23, $6 billion worth of petroleum products, medicines, diamonds, machine parts, airplanes, and wooden furniture already get duty–free access. Another $5 billion worth of exports includes yarn and fabrics, which face tariffs of 4%, while shirts, trousers, women’s dresses, and bed linen have duties of 10% to 12%. These are among the product categories that will benefit from the FTA.

Of India’s merchandise imports from the UK of $8.96 billion in FY23, over 90% attracted average-to-high tariffs. The highest tariffs are on cars at 100% and on Scotch whisky and wines (150%). 

According to sources, India may agree to reduce but not eliminate tariffs on automobiles and Scotch whiskey from the UK. For luxury cars like those from JLR, Bentley and Rolls-Royce, the UK might want zero tariffs, but India could reduce them from 100% to 50%. 

That’s the easy part. There are differences over rules of origin, which specify the level of value addition in a product to qualify for benefits. Government procurement is one of the limited policy tools still available to the government to incentivise domestic producers and need careful negotiations.

Negotiating labour standards in FTAs could, however, be tricky as onerous labour standards – including higher minimum wages – for exported products might mean a virtual ban on labour-intensive exports. Even environment standards can be used to curb imports from India.

As India exports IT and business services to the UK, an area of immediate advantage is the UK issuing priority visas to Indian professionals that travel to the UK to perform short-term assignments, a key request by India. Like most countries, the UK also associates this with immigration, a sensitive issue thanks to Brexit, and not to FTA negotiations. 

Additionally, the UK firms want “national treatment” – same rules as those which apply to local firms – in Indian telecommunications, legal and financial services like banking and insurance sectors. While India has significantly liberalised these sectors for FDI, it does not want to commit to concessions in an agreement. According to commerce ministry officials most chapters of FTA are either closed or are in final stages of negotiation. Both sides have been engaged in the 14th round of talks since January 10. It remains to be seen whether last minute efforts to sign the FTA before elections pay off.

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