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The recently signed Free Trade Agreement (FTA) between India and the United Kingdom represents a significant milestone in India's evolving trade policy and its ambition to become a major global economic power. This agreement, finalized on May 6 after over three years of negotiations initiated in January 2022, signifies more than just a bilateral trade pact; it embodies a strategic shift in India's approach to international trade and sets the stage for potential future agreements with other major economic blocs like the European Union (EU) and the United States. The speed with which the India-UK FTA was negotiated is noteworthy, particularly when contrasted with the protracted negotiations with the EU, which have lingered for nearly two decades. This relative expediency underscores the mutual benefits and strategic alignment between India and the UK, driven by the UK's need to forge new trade relationships post-Brexit and India's desire to enhance its global economic engagement to achieve its ambitious developmental goals. The UK's formal exit from the EU in December 2020 created a vacuum that needed to be filled with new trade agreements. In this context, the UK has been actively pursuing trade deals with various countries and regions, including Japan, Singapore, Vietnam, and membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a mega trade bloc encompassing 12 countries. The FTA with India, however, stands out as the UK's most crucial trade agreement since Brexit, primarily because India is one of the world's fastest-growing major economies. This presents a significant opportunity for the UK to tap into India's burgeoning middle class and digitally savvy consumer base. The FTA will facilitate improved access for India's middle class to the UK's high-value exports, including automobiles, Scotch whiskey, and legal and financial services. Conversely, India offers a vast and dynamic market for British technology, education, and professional services. The geopolitical context also plays a crucial role. With increasing global attention towards diversification away from China, India's strong economic trajectory and demographic dividend present the UK with a unique opportunity to forge a strong and mutually beneficial partnership. India's recognition of the importance of global engagement is pivotal to achieving its ambition of becoming a “viksit” (developed) India by 2047. This vision cannot be realized without significantly enhancing its participation in global trade and value chains. The FTA with the UK is therefore just the beginning of a potentially long and complex journey towards greater global integration. In the short term, India stands to gain from better access (duty-free or reduced duty) for its exports to the UK. Key sectors that will benefit include mineral fuels, machinery, precious stones, pharmaceuticals, apparel, iron and steel, and chemicals. A significant aspect of the FTA is the inclusion of provisions for easing mobility for Indian professionals and students, providing them with greater access to opportunities in the UK while addressing the demographic challenges associated with an ageing population in the UK. This element of the agreement highlights the recognition of the mutual benefits derived from the exchange of skills and talent between the two countries.
From an economic perspective, the FTA aligns with the Ricardian principle of comparative advantage, which posits that countries should specialize in producing goods and services in which they have a relative cost advantage and trade with each other. For India, this is the first major FTA outside of Asia, and the anticipated gains are substantial. The concept of voluntary trade is a fundamental departure from the forced colonial exploitative model of the past, which deindustrialized India by dismantling traditional industries, particularly textiles, and transforming them into raw material suppliers for British factories. Modern trade, in contrast, is based on mutual benefit, with nations engaging in trade because it is advantageous to both parties involved. The India-UK FTA aims to enhance trade, investment, economic growth, job creation, and innovation in both nations. To mitigate potential disruptions, the FTA incorporates safeguards, such as phased tariff reductions and quotas on goods like whiskey, automobiles, and agricultural products, to prevent a sudden surge of imports from the UK. In return, the UK will eliminate tariffs on Indian textiles, which is expected to boost manufacturing in India. The current state of bilateral trade between India and the UK is robust. By mid-2024, total trade had reached approximately £42 billion, with India maintaining a trade surplus of around £8 billion. The FTA's ambitious goal is to double trade by 2030. The UK is currently the sixth-largest investor in India, with cumulative investments exceeding £38 billion over the past three years in sectors such as financial services and manufacturing. In 2023, India was the second-largest source of FDI in the UK, highlighting the growing economic interdependence between the two countries. While the India-UK FTA provides a solid foundation for a more integrated economic partnership, continued dialogue and cooperation are essential to reduce divergence in standards and fully realize the agreement's potential benefits. The increasing importance of e-commerce, digital trade, and climate change necessitates an innovative approach to trade rules. This includes establishing standards not only for finished products but also for the processes underlying their production. Currently, India has adopted a cautious approach regarding binding labor and environmental standards within the FTA, preferring non-binding “best endeavor” clauses. This cautiousness reflects India's concerns about potential constraints on its economic growth and competitiveness.
The FTA also encourages the development of Mutual Recognition Agreements (MRAs), particularly in professional services, to facilitate the recognition of qualifications and licenses between the two countries. This is crucial for enhancing the mobility of skilled professionals and fostering greater collaboration in sectors such as healthcare, engineering, and education. Furthermore, the FTA endorses initiatives like the UK-India Education and Research Initiative (UKIERI) and promotes mutual recognition of academic qualifications to enhance student mobility and employment opportunities. This focus on education and research underscores the long-term strategic partnership between India and the UK, aimed at fostering innovation and knowledge exchange. By signing the FTA with the UK, India has signaled its conviction about the value of trade agreements and its commitment to integrating into regional and global value chains. This marks a shift from previous skepticism towards such agreements, which had created a perception of inconsistency in India's trade policy. The hope is that FTAs with the EU and the US will follow in due course, further solidifying India's position as a major player in the global economy. However, it is crucial to recognize that these agreements will only deliver their full potential if accompanied by domestic reforms to address structural deficiencies within the Indian economy. These well-known impediments include the lack of scale in many industries, labor market rigidities, logistical challenges, and bureaucratic hurdles in transactional matters. The UK FTA, along with future agreements, can serve as a catalyst for domestic reform, easing political resistance and setting the stage for an economic upgrade. In this context, well-negotiated FTAs can play a role similar to that played by global markets and the World Trade Organization (WTO) in the upscaling of the Chinese economy. By leveraging the opportunities presented by these agreements, India can accelerate its economic growth, enhance its competitiveness, and achieve its long-term developmental goals. The India-UK FTA is not just a trade agreement; it is a strategic partnership that can transform India's economic landscape and its role in the global economy. The willingness of the Indian government to engage in free trade should also boost investor confidence within India, leading to more domestic investments in infrastructure and manufacturing. These factors will then spur growth and facilitate further globalization. As Kathuria notes, the views presented are his personal perspective, but they reflect a broader understanding of the potential benefits of the FTA for both India and the UK. In sum, the India-UK FTA is a landmark agreement that signifies a strategic shift in India's trade policy, paves the way for future agreements with major economic blocs, and underscores the importance of global engagement for achieving India's ambitious developmental goals. The agreement is expected to enhance trade, investment, economic growth, job creation, and innovation in both nations, while also addressing structural deficiencies within the Indian economy and fostering greater collaboration in areas such as education, research, and professional services.
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Source: Free Trade Agreement with UK opens a path to deals with US, EU