Sanjeev Ahluwalia | India-UK FTA: Bilateral, Voluntary Colonisation?

Trade brought the English to India in the 17th century, and they stayed till the mid-20th century. So, it is only fitting that the colonial cousins initiate bilateral free trade to anticipate the demise of multilateral shepherding, by the GATT till 1995 and then the WTO. Multilateralism grew global trade (goods and services) from 20 per cent of global GDP in 1968 to 57 per cent in 2024. China illustrates the benefits of global trade. It became the second largest (individual) economy in 2010 (current dollar terms) and is marginally lower than the European Union in 2024. It’s goods and services trade peaked at 36 per cent of GDP in 2006 before moderating to 20 per cent by 2024. India’s exports peaked in 2013 at 25 per cent of GDP and are at 21 per cent in 2024.

Bilateral trade agreements are not the first choice for most countries because they are expensive and inefficient. Sadly, developing countries like India, which live on the edge, cannot afford to speculate by when multilateralism might revive. Hence the rush for multiple, bilateral deals as a second-best option.

The Free Trade Agreement was signed on July 24 in London, with more such agreements forthcoming between India and the United States and another with the EU. A framework vision document for trade enhancement by 2035 was also signed.

Both will become final after ratification by the British Parliament. The FTA is key for near-term consequences. The UK has waived import tariff on 99 per cent and India on 90 per cent of the items traded. India had a trade surplus in goods and in services of about $11.5 billion on bilateral trade of $48 billion in 2024.

The FTA in discussion since early 2022 was fast-tracked by President Donald Trump’s “reciprocal tariffs” announced on “Liberation Day” on April 1 this year. But some sobering facts remain relevant. First, economic growth in India is outstripping growth in the UK. Given already near-similar GDP levels, the UK cannot significantly absorb India’s future value added, nor can it meet India’s future import demands. Second, it is telling that neither country is in the list of top 10 exporters or importers of the other. Third, both countries export more services than goods, and use the earnings from services to import goods. Growth in trade will therefore depend on new complementarities being curated.

Top UK goods exported to India are industrial equipment, steel, luxury goods-precious stones and metals, Scotch whisky (India is the largest whisky market in the world) and precision instruments. India exports electrical equipment, boilers, machinery, mineral fuel and oil, pharmaceuticals and precious stones and metals.

The UK exports legal, business consulting, R&D and travel services to India whilst importing IT, engineering, financial and travel services from India.

India hopes to enhance exports to UK but must demonstrate it shall absorb more British goods and services. The zero rating for import taxes should improve demand in the UK for India’s traditional exports -- textiles, made-ups, carpets, leather footwear, all domestic employment generators -- by enhancing competitiveness versus rival, regional suppliers. Electrical machinery and appliances will similarly benefit.

The UK anticipates a larger market for its automobiles in India with import tax rates crashing from over 100 per cent to about 10 per cent -- but only for a limited number of automobiles and, more substantively, unlimited imports, at tax reducing in phases to about 45 per cent. Rolls Royce and Aston Martin cars, Triumph and Norton motorcycle afficionados in India are salivating. The JLR group in UK owned by India’s Tata group, already a popular brand for luxury cars and SUVs in India, will benefit the most.

Pessimists point darkly to the dilution of the “Atma Nirbhar” industrial policy, which incentivised assembly of imported components over automobile imports. A worry because the automobile sector employs about 40 million people directly and indirectly. But more than three-fourths of licensed automobiles are two-wheelers, given low per capita incomes, and ownership of even these is just 185 per 1,000 persons, while there are just 34 four-wheelers per 1,000 persons. India remains an extremely price-sensitive market. Indian manufacturers have an unbeatable, price responsive market strategy. Imported cars create a frisson of excitement amongst the uber-rich but the business smarts for scaling private transport are firmly with Indian manufacturers. Comparisons with the slaughter of Australia’s auto industry by Chinese imports aren’t apt because of the smaller market size and high-income status of Australia, versus China. India has the quadruple advantage of larger market size, higher relative economic growth, lower middle-income levels and an entrenched auto industry. Supportive industrial policy can counter low import tariffs if these get mimicked in future FTAs.

Similarly, Indian whisky manufacture is there to stay. Indian brands like Amrut, Indri, Rampur, Kamet, Woodburn and Paul Johns, have established themselves in developed markets by aligning aroma and taste with Western and Indian cuisine.

Several Indian blended brands import ingredients, which would become cheaper -- unless state governments gobble up the import cost reductions by increasing state excise tax. This is likely given that drinking and smoking are “sins”, albeit redeemable by paying tax. Two large states -- Bihar and Gujarat -- prohibit the sale of alcoholic drinks. But tipplers cross the border to more welcoming states.

Importantly, India has moderated the bar against international competition in government contracts, whilst reserving small government contracts for the domestic medium, small and micro enterprises. Of these imports, 90 per cent are micro enterprises with five or less workers.

Other than import competition for salmon and lamb farmers, the status quo in agriculture and dairy are preserved. Exemption from payment, under the “double contribution convention” of social protection taxes, will benefit Indian workers in the UK. British exports in telecom, construction and environmental services no longer need a designated local office. UK banks and insurance companies will be treated on par with Indian counterparts, though the door for legal services is yet to be opened. India also liberalised its approach to patents, in line with global practices, to accept the principle of “adequate remuneration” for patent violations.

That both sides left enough on the table for a mutually satisfactory conclusion was evident from the bonhomie at the signing ceremony. India has for too long walked a tightrope between global aspirations and domestic compulsions. There is no space for such compromises, when global competitiveness is the key for growth and equity in an uncertain global environment.

The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank