The India-UK Free Trade Agreement (FTA) negotiations are at a critical juncture, with teams from both countries striving to address the last remaining issues from the 26 negotiating subjects. If all goes as planned, the Prime Ministers of India and the UK may announce the conclusion of the FTA very soon.

The India-UK FTA marks a new era in India’s trade deals. It shifts the focus from East to West, opening doors to negotiations with Western nations like the UK, EU, Israel, Switzerland, and the US. Moreover, it includes non-trade issues like environment, labour, intellectual property rights, digital trade, government procurement, competition and gender in the FTAs, creating opportunities and challenges.

What gains can India expect with a substantial trade relationship and a surplus trade? Let’s explore the critical areas of focus, challenges and possible outcomes.

Merchandise trade. Indian products like petroleum, medicines, diamonds, machine parts, aeroplanes, and wooden furniture worth $6 billion face no tariffs in the UK, even without the FTA. These will not gain from the FTA.

Indian exports valued at $5 billion, such as textiles, apparel (shirts, trousers, women’s dresses, bed linen), footwear, carpets, cars, marine products, grapes, and mangoes, face relatively low to moderate tariffs in the UK. For example, tariffs on yarn and fabric are 4 per cent, while tariffs on shirts, trousers, women’s dresses and bed linen range from 10-12 per cent. These products will benefit from the tariff reductions by the UK. But signing an FTA alone may not substantially increase India’s labour-intensive goods exports. For instance, India’s textiles and apparel exports to Japan did not see significant gains from the FTA. Significant export growth requires improvements in product quality.

UK exports of $8.2 billion, covering 91 per cent value of total merchandise imports from the UK, enter India on payment of average to high tariffs duties. For example, the tariff on cars is 100 per cent, and on Scotch whisky and wines are 150 per cent. The simple average tariff in India on goods imported from the UK is 14.6 per cent. These products will gain from tariff reduction by India.

India may reduce tariffs on automobiles from 100 per cent to 50 per cent. India might also consider allowing a few thousand units at a 25 per cent tariff. For Scotch whiskeys, India could reduce tariffs from 150 per cent to 50 per cent over a few years, similar to what it did for Australian wines.

India has hesitated to reduce tariffs in FTAs due to opposition from dairy cooperatives and concerns about farmer welfare, making it a politically sensitive issue. Selective imports will encourage Indian firms to improve their systems and offer healthier choices to consumers without negatively impacting farmers. Import opening must enhance domestic quality rather than benefit the partner country.

Services: An area of immediate advantage for India is persuading the UK to issue priority visas to Indian professionals travelling to the UK to perform short-term assignments. However, obtaining a large number of short-duration business visas from the UK may not be easy, as the UK erroneously associates visas with immigration, a sensitive issue since Brexit.

UK firms want a pie in the expanding Indian telecommunications, legal, banking and insurance sectors. The UK may push for Indian commitments in these sectors.

In an FTA, while tariff cuts ensure immediate cost advantage to export products, no such advantage accrues to service exporters. The negotiators primarily focus on ensuring the stability of existing investment rules. They negotiate binding commitments at existing autonomous levels.

Rules of origin: This will ensure that products from third countries only receive FTA benefits if they undergo significant transformation in the exporting country. India prefers conservative rules of origin compared to most developed countries, leading to extended discussions and negotiations. India may need to be more flexible in its rules of origin framework, especially as its firms in sectors like chemicals, electronics and synthetic textiles increasingly use imported inputs.

Government procurement

India has taken no commitment on the government procurement chapter at the WTO; hence, it can favour domestic firms without fearing trade rules violations. In the FTA, allowing the UK producers to sell to India’s government procurement sector would bring them on par with Indian firms. On the other hand, Indian firms face a competitive and restricted government procurement market in the UK with little business prospects. India needs to be conservative and careful.

Labour standards, gender, environment, digital trade, IPRs: India must make domestic rules/standards before taking commitments under the FTAs. Till then, India must avoid taking onerous obligations on non-trade issues.

For example, the text in the sustainability chapter of the FTA may provide legal justifications to the UK for imposing non-tariff barriers on Indian products to promote sustainability. If this happens, the market access that India might expect under the FTA could be undermined.

India should not agree to free cross-border data flows. Ownership of national data is crucial for developing public services. On labour issues, India should not agree to reiterate the ILO conventions agreed. Commitments at ILO are the best endeavour, but reiterating those under an FTA becomes binding and actionable. This logic applies to the environment, sustainability and other chapters. A text about the participation of women and MSMEs may be a disguise for obtaining market access concessions in government procurement or services.

The UK Government intends to introduce emissions reporting in 2025 and a phased implementation of the Carbon Border Adjustment Mechanism (CBAM) in 2026. Once CBAM is launched, the UK products will enter India at zero duties, but Indian products may pay 20-35 per cent tariff equivalent as CBAM charges. A suitable text may be inserted in the FTA chapters dealing with this possibility.

The India-UK FTA presents a mixed picture of potential gains and complex challenges. The path to a successful FTA requires a delicate balance of economic interests, political sensitivities, and a commitment to improving the quality of Indian goods.

The writer is founder, Global Trade Research Initiative, a research group focussed on trade, technology and climate change