UK–India Free Trade Agreement: Expanding India’s global economic partnership

Impact on EU-India FTA: Advantage India

The finalisation last week of the Free Trade Agreement between India and the United Kingdom is likely to spur FTAs with two other important trading partners of India, the United States and the European Union. If they, too, are signed, as is expected, they will change the dynamics of India’s trade relations and will transform its trade trajectory in the new global order.

After three years of intense negotiations, on May 6, the United Kingdom and India finalised a historic Free Trade Agreement (FTA), marking the UK’s most significant trade pact since its departure from the European Union in 2020. The deal aims to enhance economic ties between the India and the UK, respectively the world’s fifth and sixth-largest economies, with projections indicating an annual increase of GBP 25.5 billion (USD 34 billion) in bilateral trade by 2040.

This comprehensive FTA is poised to strengthen the economic partnership between the two countries, fostering growth, creating jobs, and offering consumers in both countries access to a broader range of goods and services.

With the signing of the deal, the UK has stolen a march over the two other FTAs that India is negotiating, with the United States and the European Union. The most important aspect of the deal is that it has the imprimatur of a bipartisan political consensus in Britain. Also, in the political context, the agreement reinforces the economic relationship, the most crucial pillar of India’s ‘Comprehensive Strategic Partnership’ with the UK.

The agreement has long been touted as one of the biggest prizes for the UK after Brexit. This landmark free trade agreement is also being hailed as strategic win for both nations. The agreement is set to enhance market access, reduce tariffs and foster economic growth for both countries. The pact unlocks the potential in economic ties and can build confidence in other key sectors as well. The changed geo-economic environment has given a sense of urgency to the pace.

Key Elements

It has been agreed that the UK will lower taxes on goods imported from India in clothing and footwear, food products including frozen prawns, jewellery and gems, some cars. India will cut taxes on goods imported from the UK, such as cosmetics, scotch whisky, gin and soft drinks, higher-value cars, food including lamb, salmon, chocolate and biscuits, medical devices, aerospace, electrical machinery. The deal will also allow British firms to compete for more services contracts in India. The deal is expected to increase bilateral trade by GBP 25.5 billion, UK GDP by GBP 4.8 billion and wages by GBP 2.2 billion each year in the long run. The UK’s deal with India is its third biggest after its agreements with Australia and Japan.

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The FTA also aligns with the Indian government’s commitment to job creation in India through the UK-India trade deal, especially for its burgeoning youth population. As these sectors expand, they will likely create employment, thereby contributing to economic stability and growth. Another noteworthy feature of the UK-India FTA is its ambitious commitment to enhance the mobility of professionals and services. Indian service providers, particularly in Information Technology, financial services, and professional sectors, are likely to gain a competitive edge in the UK market.

Also, the introduction of a Double Contribution Convention (DCC) will exempt Indian workers temporarily in the UK from social security contributions for three years, similar to the UK’s Social Security Agreements with countries like Switzerland, Norway and Canada. It will not affect access to benefits or the UK immigration health surcharge and will come into force alongside the broader FTA. This provision not only enhances competitiveness but also creates financial gains for both Indian workers and their employers. In the UK, services sectors, including financial and legal services, also gain market certainty in India’s growing economy.

The agreement will come into force in a year and in the meantime both countries will have to work hard on the desired reforms to make it sure that the FTA works as a win-win for both.

Historical Perspective

The UK-India FTA signals a historical reality in which India has been recognised as a global power and the “Brightest Jewel” of the former British Raj. To understand that from historical perspective, it is important to go back in the early 1600 when the British East India Company came to India for trade. Over time, that turned into colonial rule where India mainly supplied raw materials to the British, while their goods flooded Indian markets. India’s rise therefore in the new global order is not a miraculous novelty, it is in fact a return to its traditional global trade pattern. It was only at the very end of 18th century, after the East India Company began to cash in on the Mughal Empire’s riches, the era of Indian economic decline had begun, and it was precipitous.

In 1600, when the East India Company was founded, Britain was generating 1.8 pc of the world GDP, while India was producing 22.5 pc. By 1870, at the peak of the Raj, Britain was generating 9.1 pc, while India had been reduced for the first time to the epitome of a Third World Nation, a symbol across the global famine, poverty and deprivation. But today things are returning to historical norms. There are over 950 Indian-owned companies operating in Britain and over 650 UK companies operating in India cumulatively supporting over 600,000 jobs across both economies.

Rise of India in British perspective

It is important to state the extra ordinary transformation of Britain’s relationship with India. Britain’s relationship with India is primarily driven by economic considerations rather than political and normative considerations. This is a relationship in which India’s hand is increasingly being politically strengthened vis-à-vis the UK precisely through India’s increasing political and economic weight. Also, the relationship is an asymmetric one in which India is more important to the UK than the UK is to India, and in which the UK is pursuing India more than India is pursuing the UK. India’s rise as a global power, politically and economically, has been a significant development in the international system and the UK foreign policy recognised this.

The FTA though were wanted by both sides, but the formal negotiations had to wait until the two-year period for Britain’s exit from the EU came to its conclusion. But still it took nearly two years to start the negotiations primarily because British politics was not ready to accept the fact that India was now a strategic partner and an important economic power. The UK government may indeed have realised that relations with India are at the top of the priorities of the UK’s foreign policy’, but relations with the UK are not at the top of the priorities of India’s foreign policy.

UK-India relationship and negotiating FTA

Britain and India have a complex and multifaceted history. Over the last few years, the world’s biggest democracy with the largest population of the world has matched its political freedoms with economic ones unleashing a torrent of growth, wealth creation and prosperity that is transforming the nation to play a big global role with its economic clout. This is why Britain was quick to understand the importance of India for its own economic role in the new political and economic environment. The 1.6 million British Indian Diaspora in the UK will play a big role in navigating the strategic relations and fruits of free trade between the two counties.

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It is just about 77 years since India gained its independence from the British Empire and it is safe to assume that Britain never imagined that a country which it had ruled, and ruined, for nearly 200 years will in just eight decades outplace British economy and emerged as a responsible trade partner. India’s direct contributions to the British economic development have not been seriously recognised and with the FTA now, it will.

India to have upper hand in EU-India FTA negotiations

Beyond propelling bilateral trade, the India-UK trade deal could also provide a timely boost for India’s free trade negotiations with EU and the US. By concluding the free trade negotiations with UK in record time, India has created a greater space for itself on the ongoing FTA negotiations with the European Union. India has also sent a message to the EU that sense of accommodation, compromises instead of confrontation and practicality in approach in resolving the issues is the best way to reach the desired distance.

Although India’s negotiations with the EU have been revitalised especially after the recent visit by the European Commission President Ursula von der Leyen along with the College of Commissioners to New Delhi in February, it will require bold political decisions on both sides to clinch the deal by the end of 2025. The trade pact with UK was done in just three years of negotiations and with EU it is almost 18 years since the talks began in 2007, and yet the FTA to see the light of the day.

This also speaks of the complexity of EU structure which hinders its ability to move in a decisive manner. It is hoped that EU will draw a lesson from the UK-India trade pact and move quickly to resolve the remaining issues. India will certainly use the FTA with the UK as a benchmark for its negotiations with other trading partners. Of late, the EU has shown flexibility in addressing India’s specific concern especially on Carbon Border Adjustment Mechanism (CBAM) which aims to put a tax on all imports into the EU, based on the carbon emissions generated in producing the good.

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However, India must also be ready to confront the unpredictability of EU policies. It is also important to note that while British bureaucracy is no less rigid than EU, they are more pragmatic, practical and visionary.

India’s strategic trade initiatives reflect India’s commitment to integrating more deeply into the global economy, diversifying its trade partnerships, and fostering economic growth through enhanced international cooperation. India with its low presence, of less than 3 pc in world trade is not often in a position where it can impose its preferences bilaterally. Therefore, trade ties with EU which has 28 pc of global imports, making it a key export market for India is very important. An FTA with the EU, India’s largest trading partner, will be a game changer in India’s crucial journey to become a developed nation by 2047. Also, if FTAs that India is negotiating with other countries are executed well, they will position India as a lynchpin in a shifting economic order, blending its demographic and democratic strengths with a more connected, competitive market presence.

(Sunil Prasad is the Secretary General of Brussels based Europe India Chamber of Commerce. The views expressed here do not necessarily reflect those of Media India Group.)