Beyond the missed deadlines, India-UK FTA talks at a tricky turning point

India and the UK are set to relaunch free trade agreement talks next month under Keir Starmer's Labour Party, facing critical challenges including unresolved issues and shifting political priorities

Three British prime ministers, 14 rounds of negotiations, two missed Diwali deadlines, and general elections later, India and the United Kingdom (UK) hope to relaunch the much-awaited free trade agreement (FTA) talks under the Keir Starmer-led Labour Party next month.

 

India-UK FTA talks were launched 34 months ago, under the Conservative government headed by former British prime minister (PM) Boris Johnson, with an ambitious target to seal the deal in nine months. However, political instability in the UK, unresolved differences over various issues, and general elections in both nations during April-July further delayed the fruition of the deal.

 

While thorny issues are largely expected to remain the same even under the new government in the UK, the Labour Party is seen as being more ‘sensitive’ to a scenario of possible job losses and labour concerns back home, as compared to the Conservative Party, which was seen as ‘pro-business’. As a result, reaching agreements on modern trade issues such as labour, environment, and a social security pact may become even more challenging.

 

For instance, in the FTA talks, the Labour Party-led government in Britain will most likely expect stronger commitments on labour and environment. During negotiations so far, India has been pushing hard to conclude such chapters on a ‘best endeavour’ basis or without any binding commitments.

 

Experts pointed out that it will be difficult to finalise the deal if India is unwilling to change its stance on some of these issues.

 

Arpita Mukherjee, professor at the Indian Council for Research on International Economic Relations (ICRIER), said there is global pressure to give commitments on modern trade issues such as labour, environment, and digital trade.

 

“India’s strategy should be to offer a combination of best endeavour clauses (non-binding commitments) as well as commitments wherever possible. We need to show one or two areas that are low-hanging fruits where we can make commitments. Of course, where domestic regulations do not allow, we should not give any commitment,” she added.

 

Similarly, the new government led by Starmer is also in favour of rolling out the Carbon Border Tax, which India has been vehemently opposing while bargaining for relief measures as part of the FTA. “The UK had announced the rollout of the Carbon Border Tax under [former prime minister Rishi] Sunak. It may be equally or more difficult for India to seek relief under such a measure from the current government,” a person aware of the FTA talks told Business Standard.

 

Crucial deal 

The proposed trade deal between India and the UK, if materialised, will be strategically and economically critical for both nations. For Britain, a trade deal with India is crucial as it attempts to recalibrate a post-Brexit trade relationship with the world. India is also the UK's second-largest source of foreign direct investment (FDI).

 

For India, this could be a major FTA with its fourth-largest export market, a key developed nation, and a chance to broaden its scope to include modern trade issues.

 

Jayant Dasgupta, India’s former ambassador to the World Trade Organisation (WTO), said although there are several areas where India and the UK need to resolve differences, sealing the trade deal will be possible if both countries are ready to make compromises.

 

“Since Britain’s economic growth has been sluggish, the ability to yield ground—give concessions—will be determined by the country's domestic priorities,” Dasgupta said.

 

The UK is India’s 14th-largest trade partner, with total trade at $11.5 billion during the first six months of the financial year (April-September). The UK was also India’s fourth-largest export destination during the same period. Exports from India stood at $7.3 billion, up 12 per cent year-on-year. Imports from the UK stood at $4.2 billion, up 30 per cent year-on-year.

 

Indian exporters of labour-intensive products such as textiles, apparel, footwear, and agricultural goods expect a boost from the proposed FTA due to greater market access. Experts, however, pointed out that India is unlikely to see major gains in terms of tariff cuts, as Britain is already a low-tariff country. As a result, India should negotiate hard to maximise benefits through services and investment.

 

According to the Delhi-based think tank Global Trade Research Initiative (GTRI), the India-UK FTA is expected to yield only limited trade benefits for India, as many of its exports to the UK already enjoy low or zero tariffs. “Substantial growth in Indian exports to the UK will ultimately hinge on product quality improvements rather than the FTA alone,” GTRI said in a report in October last year.

 

On the other hand, India is a relatively high-tariff nation, with certain items such as Scotch whisky attracting 150 per cent customs duty. Similarly, the UK is bargaining hard for a greater market for other high-tariff items such as electric vehicles, cars, and wines.

 

India has agreed to reduce customs duty on such products but in a staggered and limited manner to ensure that the domestic wine industry does not face predatory pricing.

 

Dasgupta cautioned that before finalising its offer to give British companies greater market access to items such as whisky, India needs to be prepared for similar demands from the United States—a top manufacturer of whisky. Additionally, the European Union (EU) is also raising its demand for accelerated access to wines and spirits from India under the proposed India-EU trade deal.

 

Thorny issues 

Despite 14 rounds and substantial progress in FTA talks, the proposed social security agreement (SSA)—one of India’s key demands—remains a sticking point under the trade deal.

 

“A social security pact will continue to be a tough call even for the new UK government since it is a politically sensitive matter,” the person cited above said. SSAs are bilateral agreements signed between countries to protect the interests of skilled, professional cross-border workers by ensuring that social security contributions are not made in both countries or paid doubly.

 

The UK has been seeking more opportunities in telecommunications, legal, and financial services in the Indian markets as part of the deal, while India’s focus has been on a liberalised migration policy for its skilled workers. Other contentious issues include the UK’s demands for lower tariffs on whisky and automobiles, as well as chapters on rules of origin and intellectual property rights (IPR).

 

Another key area of disagreement has been the proposed bilateral investment treaty (BIT), mainly over the resolution of disputes. One contentious issue is the exhaustion of the ‘local remedies’ clause under India’s model BIT, adopted eight years ago.

 

The UK, on the other hand, believes that mandating this provision will make the process of dispute resolution longer.

 

Navigating these intricate negotiations will shape the broader trajectory of India-UK trade relations.     

34 MONTHS AND COUNTING

 

 2022

  - January: India-UK talks begin

  - April: Conservative Party member and UK PM Boris Johnson and PM Narendra Modi decide to conclude FTA negotiations by Diwali (October) 2022

  - July: Boris Johnson resigns

  - September: Liz Truss replaces Boris Johnson, but resigns 45 days later

  - October: Rishi Sunak takes over as Britain’s PM; former UK Trade Secretary Kemi Badenoch announces FTA negotiations are progressing well, but that the two countries are not working on the Diwali deadline

  - December: India,UK resume FTA negotiations after a hiatus of more than four months

 

 2023 

- October: India, UK try to finalise the deal by Diwali (November) 2023; talks fail as thorny issues remain unresolved

 2024

  - January-March: Top officials from both countries have multiple meetings in New Delhi and London to seal the deal before India’s general election

  - March: Sunak and Modi speak on bilateral  ties and FTA

  - April-June: FTA talks paused due to General Elections in India

  - May: UK announces election

  - July: Labour Party sweeps to power; Keir Starmer takes over as British PM

  - November: Starmer, Modi meet on the side lines of the G-20 summit in Brazil; relaunch of talks in 2025    THORNY ISSUES

- Some of the disputed issues include India’s demand in the services sector with movement of skilled professionals, a social security agreement, relief measures under UK’s proposed carbon border tax

  - UK's demands for reduced tariffs on whisky and automobiles, opening up India's sectors like legal, architecture, and financial services

  - Both have struggled to iron out differences in the bilateral investment treaty over resolution of disputes and finalising rules of origin 

NEW UK GOVT 

- The new Labour Party government in the UK is seen as more ‘sensitive’ to a scenario of possible loss of jobs and labour concerns; the rival Conservative Party is seen to be ‘pro-business’

  - Modern trade issues, such as labour, environment, and social security remain tricky