How the UK-India FTA could reshape India’s trade future with the US and EU

“A beacon of hope amid the spectre of protectionism,” Rain Newton-Smith, chief executive of the Confederation of British Industry, did not mince words about the signing of the India-U.K. Free Trade Agreement (FTA). The response encapsulates relief amid an underlying wave of fear that has taken over global markets after U.S. President Donald Trump announced reciprocal tariffs. “This historic deal is the biggest the U.K. has concluded since leaving the EU, and the most ambitious India has ever undertaken,” a U.K. government statement read after the May 6 deal. According to U.K. India Business Council chair Richard Heald, “It matters when the fifth and sixth largest economies reach a trade agreement”. India and the U.K. commenced the FTA talks in January 2022. More than three years and 14 rounds of negotiations later, they agreed on zero duty access to 99% of India’s goods exports to the U.K., as well as the removal or reduction of tariffs on 92% of imported goods to India. The deal is a shot in the arm for India’s labour- and tech-intensive manufacturing sector. “Indian companies that manufacture products like automotive parts, textiles, jewellery, toys, etc., are probably going to sell more in the U.K.,” says Saurabh Agarwal, Tax Partner, EY. For traders in the U.K., the FTA will slash Indian import duty on key products such as whisky, cosmetics, and medical devices, locking in reductions on 90% of tariff lines, with 85% going tariff-free in a decade. “Premium scotch, chocolates, cookies, and medical devices will be available to Indian consumers at the right price... The government wants to create a level playing field. That’s a win for the consumers,” Agarwal explains. The Double Contribution Convention waives off social security contributions for Indian workers who are in the U.K. temporarily and by their employers for up to three years, thus benefitting the services sector. The two nations will now fine-tune the legal text before ratifying it. Hence, it may take up to a year before the pact is implemented. Yet, the promises are huge. The FTA is expected to double the India-U.K. bilateral trade in five years. It is around $60 billion now. A policy paper by the U.K.’s Department for Business and Trade states that the deal “is expected to increase U.K.’s GDP by £4.8 billion and wages by £2.2 billion each and every year”. From whisky businesses of Scotland to the services sector of Northern Ireland, and the lamb traders of Wales, it forecasts a windfall gain for the U.K. nations. The deal will open India’s $600-billion government procurement market to U.K. businesses, who are expected to get exclusive treatment under ‘Make in India’. “U.K. companies will be treated as a class-2 supplier if at least 20% of their products or services are from the U.K.–granting them the same status that only Indian firms currently enjoy,” the document adds. Once signed, the U.K. deal will be the fourth bilateral trade pact that India has inked in recent years. While it has entered similar deals—the Comprehensive Economic Partnership Agreement with the U.A.E; the Economic Cooperation and Trade Agreement with Australia; and the Trade and Economic Partnership Agreement with Iceland, Liechtenstein, Norway, and Switzerland—the member countries of the European Free Trade Association, the impact of the U.K. FTA will be more far-reaching. Despite the U.K. being India’s third largest export destination, after the U.S. and the U.A.E., the bilateral trade value is not heavily petro-dependent. India’s imports from the U.K. are far lower than those from the U.S. and the U.A.E. Hence, the manufacturing powerhouse that is the U.K. will find a strong partner in India’s growing opportunities. EY’s Agarwal feels the U.K. deal could prove to be a blueprint for India’s future pacts, especially with the U.S. and the EU. The FTA goes beyond trade and includes what the U.K. terms as “the highest levels of environmental commitments India has ever agreed to”. From tackling corruption to consumer protection and good regulatory practices, it covers a wide range of topics. The true test, however, lies in how India will handle the U.K.’s Carbon Border Adjustment Mechanism (CBAM), says Ajay Srivastava, founder, Global Trade Research Initiative. Come 2027, CBAM will place a carbon price on some of the most emissions-intensive industrial goods imported to the U.K. “If Indian exports still face CBAM levies while the U.K. goods enter India duty-free, it risks turning a balanced FTA into a one-sided bargain,” Srivastava explains. Even as the fine print, which will reveal the real impact, is being awaited, the deal couldn’t be timed better. Currently, it seems to be the perfect antidote to the U.S. tariffs. But one pertinent question remains: will the India-U.S. FTA mirror the U.K. deal?

How the UK-India FTA could reshape India’s trade future with the US and EU

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