What Happened To The Indo-British Free Trade Deal?

'Tarikh Pe Tarikh’ — this famous dialogue from Sunny Deol’s movie fits well with the delayed free trade agreement (FTA) between India and the United Kingdom (UK). In 2022, Union Commerce Minister Piyush Goyal said that we are working towards the Diwali deadline both countries are yet to finalise the crucial agreement. 

Last year, several media houses reported that the trade deal between the two nations is on the "verge of collapse" amidst Indian ministers' reaction to Home Secretary Suella Braverman's criticism of migrants policy. Braverman said that she had "concerns'' about the deal as it will increase the migration to Britain and Indians represented the largest group of visa overstayers.

However, a recent statement from the Ministry of Commerce and Industry said that Goyal concluded a productive visit to London from 10 to 12 July, during which he engaged with several government officials and industry leaders and had crucial discussions to strengthen the India-UK trade relationship. 

"The visit was strategically timed, coinciding with the critical stage of ongoing negotiations and proved to be instrumental in moving the discussions forward," it said. Several experts said that delayed talks in India-UK FTA and missing the October 2022 deadline were due to leadership changes in the UK. 

However, out of 26 policy areas, 14 chapters have been substantially closed for negotiations and significant progress is made in other chapters. According to industry insiders, about ten rounds of official talks are concluded, with the 11 rounds of India-UK FTA scheduled this month. 

"Currently, this trade negotiation is facing challenges in areas like government procurement, rules of origin, data localisation and visa issues, which are crucial to protecting India's economic interests, especially its MSMEs and service industries. However, India may finalise an interim trade agreement based on mutual interests as a way to make progress while addressing critical concerns," said Vijay Kalantri, Chairman, MVIRDC World Trade Center Mumbai. 

As of 2023, India has signed 13 regional trade agreements with 11 countries and two regional blocs. In the last two years, three new agreements with Mauritius, the UAE and Australia were signed to strengthen trade relationships. Modi government is in full swing to finalise three major FTAs with the UK, EU and Canada. 

Here comes the dragon 

According to a Bloomberg report, Rishi Sunak-led Britain has signed a treaty to join a Pacific trade deal. It became the first new member since the framework came into force and diverted the attention to several other applicants led by China.

Formerly known as the Trans-Pacific Partnership (TPP), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) one time included the United States (US) and was considered a way of restricting China’s growing dominance in the Asia Pacific. 

Nations such as Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the UK and Vietnam are CPTPP members. As per the International Monetary Fund (IMF), the CPTPP bloc, which is home to 500 million people would account for 15 per cent of global gross domestic product (GDP) including the UK.

"India must see the UK's inclusion in the CPTPP as significant, offering opportunities and challenges. As China leads the pact, India should be cautious of potential impacts on global trade share and competitiveness. Vigilance and strategic actions are crucial to leverage opportunities and overcome challenges," said Rohit Arora, Chief Executive Officer (CEO) and Co-founder of Biz2Credit & Biz2X.

Experts feel that with the UK joining the Pacific trade deal, Indian exporters to the UK may now face increased competition from countries like Vietnam, Mexico and Malaysia (who are members of this deal and who may have duty-free access to the UK). 

Nirav Choksi, Co-founder and CEO at CredAble believes that India should view the UK's accession to the CPTPP as an opportunity. The CPTPP is a significant economic bloc with a combined GDP of USD 12 trillion and India would benefit from increased access to this market.

"However, we must also acknowledge the potential challenges, such as stringent intellectual property rules and government procurement requirements, that could disadvantage Indian businesses," said Choksi. 

Benefiting Indian businesses 

After the Covid-19 pandemic and the consequent change in the global landscape, FTAs are a vital tool to help the Indian economy become export-oriented as it offers exporters and importers of participating countries duty-free access to each other's markets. In FY23, the UK was India's seventh largest export destination with a total goods export of USD 11.4 billion.

"FTAs help Indian companies enter the local market in different countries and compete on a level playing field due to wide market access, diversification in trade risks and better integration of markets," said Saket Dalmia, President, PHD Chamber of Commerce and Industry (PHDCCI)

Dalmia added that India’s exports to markets i.e. ASEAN, SAFTA and Korea (it has signed FTAs with) have significantly increased. With the recent signing of FTAs with UAE and Australia, India seeks to improve its balance of trade with these countries. 

The recent FTA with UAE has resulted in a significant increase in trade and services activities between the two nations, with trade reaching USD 84 billion in 2022-23, growing by 16 per cent from the previous year. The first quarter of that year saw a substantial 25 per cent growth in non-oil trade, signifying the FTA's role in fostering trade expansion amid a sluggish global trade environment, which only witnessed 2.5 per cent growth. 

"These agreements have allowed Indian businesses to tap into new consumer markets, making their products more attractive and affordable compared to non-FTA members. Moreover, FTAs have facilitated market diversification, reducing India's reliance on traditional markets and mitigating economic risks," added Arora. 

Beyond the borders

India has initiated talks with the Association of Southeast Asian Nations (Asean) to address concerns over the rules of origin and trade imbalance. India signed its FTA with Asean in 2009 which came into effect in 2010. 

Since then, India’s merchandise exports to the bloc have grown from USD 34.5 billion in 2011 to USD 44 billion in 2022-23. Various sectors such as textiles and apparel, agro and food products, leather etc. witnessed a sharp rise in their exports to the bloc, as per the data. 

"India should adopt a single criterion of a minimum value addition of 40 per cent instead of the dual requirement of having a minimum 35 per cent regional value addition and a change in tariff subheading as stipulated in the Asean-India Trade in Goods Agreement (AITIGA). India’s trade with Asean has transformed from trade in agricultural raw materials and food to manufactured goods. This shift in export composition is driven by transport equipment, chemicals and textiles," added Dalmia. 

Talking about challenges, WTC's Kalantri said that a key challenge faced by Indian exporters is the huge compliance burden in meeting the rules of origin under the free trade agreements. 

"In order to fast-track compliance and customs clearance process, India may seek mutual recognition of the Authorised Economic Operator (AEO) program with its FTA partner countries. AEO-accredited exporters enjoy certain benefits such as fast-track clearance of cargo, deferred payment of duty etc. If the Indian AEO program is accepted by our FTA partner country, it will facilitate the timely clearance of cargo by the customs of this partner country," Kalantri explained. 

Indian exporters also face a plethora of non-tariff barriers which need to be addressed in such deals. A higher import duty on capital goods may hinder India's potential as a global manufacturing hub and hence it should reconsider the import duty to enhance its participation in the global value chain and accelerate the success of its Make in India program, MVIRDC World Trade Center Mumbai said in a report.

The report suggested that India should consider rationalising the import duty on capital goods to not only assist domestic manufacturers in adopting modern and cutting-edge technology but also to foster fair competition in the domestic market. 

"India needs to adopt a comprehensive approach with friendly nations where the chance of goods getting rerouted from China is low. This includes actively engaging in bilateral and regional trade discussions, selecting partner nations based on complementarity and potential gains, prioritising industries with a competitive edge, and addressing issues like trade imbalances and origin-based regulations," said Arora. 

Another concern for India is the significant trade deficit, which has increased by 70 per cent to reach USD 43 billion in FY22-23, raising trade imbalances. One reason is the difficulty in verifying the country of origin for certain goods, especially as exporters in Asean countries enjoy a competitive advantage with the lower cost of credit compared to Indian manufacturers. To address these concerns, India initiated talks with Asean to tackle issues related to rules of origin. 

"India should emphasise the advantages of reciprocal trade agreements, facilitate ease of doing business, and create an investor-friendly environment. Additionally, investing in infrastructure, enhancing domestic manufacturing capabilities, and leveraging technology can bolster India's position as an attractive trading partner and promote long-term economic growth and prosperity," added Biz2Credit and Biz2X's Arora. 

CredAble's Choksi added that India-Asean FTAs have proven advantageous to certain sectors. Information technology and electronics, automotive, agriculture, and services, including IT and tourism, have witnessed increased exports to ASEAN countries. "Conversely, the textile and pharmaceutical sectors have not experienced substantial export growth despite India's prominence," he added.

Meanwhile, there is a need for India should to trim down its dependence on China and should enter into FTA with nations which provide it with improved market access and strengthen its strategic trade and investment linkages to make its supply chain much more resilient.