Context
The article examines the India-UK Free Trade Agreement (FTA), which is expected to be completed by March 2023 despite the deal’s limited benefits for India.
Relevance
GS Paper 2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
Mains Question
Protectionism may be beneficial in the short term, but it harms the economy in the long run.” Comment. (150 Words)
About FTA
- An FTA is an agreement between two or more countries to reduce tariffs, quotas, subsidies, or prohibitions on the import and export of goods and services between them.
- It includes lowering tariffs, quotas, subsidies, or prohibitions that could improve cross-border exchange of goods and services.
- The agreement could cover a wide range of topics, including goods, services, investment, intellectual property, competition, government procurement, and others.
Background on the India-UK bilateral relationship
- In 2004, the bilateral relationship between India and the United Kingdom was elevated to the level of Strategic Partnership.
- India is the United Kingdom’s 12th largest trading partner, accounting for 1.9% of total trade by the end of 2022. India’s seventh largest export destination is the United Kingdom.
- Bilateral trade: The two countries’ bilateral trade increased to USD 17.5 billion in 2021-22, up from USD 13.2 billion in 2020-21.
- Trade surplus in India’s favour: For example, in 2021-22, India’s exports were USD 10.5 billion, while imports were USD 7 billion.
- Investment: The United Kingdom is a significant investor in India, having invested USD 32 billion in foreign direct investment (FDI) inflows between 2000 and 2022.
- Major market for Indian IT services: The UK is one of Europe’s largest markets for Indian IT services, with services accounting for 60% of total annual trade between India and the UK.
- Ready-made garments and textiles, gems and jewellery, engineering goods, petroleum and petrochemical products, transport equipment and parts, spices, metal products, machinery and instruments, pharma and marine items are among India’s main exports to the UK.
- Precious and semi-precious stones, ores and metal scraps, engineering goods, professional instruments, non-ferrous metals, chemicals, and machinery are among India’s major imports from the United Kingdom.
- Roadmap 2030: In 2021, an ambitious “Roadmap 2030” was adopted to elevate bilateral relations to a “Comprehensive Strategic Partnership.”
- The ‘Roadmap 2030’ also sought to strengthen ties in trade and investment, defence and security, climate change, healthcare, and people-to-people exchanges.
- Enhanced Trade Partnership (ETP): This initiative was also launched with the goal of more than doubling bilateral trade by 2030.
India-UK Free Trade Agreement
- India and the United Kingdom will begin formal FTA negotiations in 2022 in order to obtain a “fair and balanced” FTA that will cover more than 90% of tariff lines and allow bilateral trade to reach its target of around $100 billion by 2030.
- In addition to products, services, and investments, this “new-age FTA” covers intellectual property rights, geographical indications, sustainability, digital technology, and anti-corruption.
- Transitions from fintech to green tech and automation to artificial intelligence are also being discussed.
Significance of FTA
- For the UK, the ‘Indo-Pacific tilt’ has been identified as one of the core components of its international and export strategies, which includes deepening trade relations with India.
- A successful conclusion of an FTA with India would boost Britain’s ‘Global Britain’ ambitions, as the UK has sought to expand its markets beyond Europe since Brexit.
- Additionally, India’s growing economy, growing middle class, and large consumer market make it an appealing trading partner for the UK.
- For India: The United Kingdom is an Indo-Pacific regional power, and it has also confirmed £70 million in investment funding to support the use of renewable energy infrastructure in India.
- Duty concessions under the pact would assist Indian labor-intensive sectors such as textiles, leather, and gems and jewellery in increasing exports to the UK market.
- The FTA will provide Indian fisheries, pharmaceutical, and agricultural products with easy market access.
Factors impeding FTA completion
- India’s FTA expectations: India wants to increase its exports of textiles, food and beverages, pharmaceuticals, tobacco, leather and footwear, and agricultural items such as rice to the United Kingdom.
- India also wants access to Indian legal services in the UK, as well as visa relaxation for Indian workers in the UK.
- UK FTA expectations: The UK is eager to gain India market access for transport equipment, electrical equipment, medical devices, chemicals, motor vehicles and parts, and other items that could impact local industry players and boost the manufacturing ecosystem.
- It is especially interested in India lowering import duties on Scotch Whisky and automobiles, which are currently around 150% and 125%, respectively.
- UK businesses make a strong case for prohibiting data localisation and facilitating cross-border data flows through FTA agreements, as India’s data localisation rules currently prevent foreign companies from taking data out of India.
- The UK also wants a separate chapter on financial services and wants to include labour in the scope of the FTA.
The FTA’s potential economic consequences for India
- Limited gains in exports: India can expect a modest increase in goods and services exports, but the UK stands to gain more than India.
- According to a study conducted by the UK’s Department of International Trade, the India-UK FTA could increase India’s bilateral exports to the UK by £10. 6 billion and the UK’s by £16. 7 billion by 2035.
- Risk of unemployment: Job losses are anticipated in sectors where imports from the United Kingdom are expected to displace domestically produced goods and services in India, such as the opening of services sectors, particularly financial services.
- Limit domestic production: Government procurement in India favours Indian manufacturers and service providers.
- However, FTA provisions require UK firms to be included in bids for public sector contracts in India. This could limit the government’s ability to use policy instruments to boost domestic production of goods and services.
- Restrict the supply of generic medicines: Doctors Without Borders recently warned that the intellectual property provisions proposed by the United Kingdom are intended to limit the production, supply, and export of affordable generic medicines from India.
- The risk of law harmonisation: The demand for “harmonisation” of Indian patent law with the laws of the United Kingdom will result in the dilution of important provisions in the Indian patent system, such as “evergreening,” which is required for the manufacture of generic medicines and vaccines.
- Limit climate-friendly policies: Green technologies are more likely to be developed in developed countries, and India must implement innovative policies to avoid becoming overly reliant on green imports.
- However, it is anticipated that the FTA will include environmental obligations that will stymie the government’s efforts to transition to a low-carbon economy driven primarily by domestic players.
- Limit digital leverage: The data sets that represent India’s consumers represent a more than $200-500 billion opportunity. However, it would be detrimental to India’s economic interests if FTA provisions prevented India from capitalising on its data advantage.
Conclusion
- India is on track to become the world’s third largest economy by 2050, having already surpassed the United Kingdom to become the world’s fifth largest economy, making it the United Kingdom’s preferred partner.
- However, for the sake of the country’s robust economic future, a rigorous and impartial assessment of the anticipated economic benefits and costs of the India-UK FTA is required.
