Why in the News?

India and the United Kingdom have signed a landmark Free Trade Agreement (FTA), under which 99% of Indian exports to the U.K. will have no import duties, Prime Minister Narendra Modi and U.K. Prime Minister Keir Starmer announced on Tuesday.

What are the key benefits for India under the Free Trade Agreement (FTA) with the United Kingdom?

• Zero-Duty Access for 99% of Indian Exports: This significantly enhances India’s export competitiveness in the U.K. market. Eg: Indian gems and jewellery, apparel, and engineering goods will enter the U.K. without customs duties, making them more attractive to British buyers.

• Social Security Relief for Indian Workers in the U.K: Indian professionals and their employers will be exempt from social security contributions for up to 3 years. Eg: Indian IT professionals on temporary assignments in the U.K. will take home higher net salaries, encouraging Indian firms to send more workers abroad.

• Boost to Services Trade and Investment Flows: The FTA facilitates easier movement of professionals and investors, promoting service sector growth and foreign direct investment (FDI). Eg: Indian consultancy firms or startups may find it easier to operate or invest in the U.K., supporting India’s goal of becoming a services export hub.

Who are the major Indian stakeholders expressing optimism about the FTA with the U.K., and why?

• Engineering Goods Sector: Expects a significant boost in exports due to reduced or zero tariffs. Eg: The Engineering Export Promotion Council (EEPC) projects engineering exports to the U.K. to nearly double to $7.55 billion by 2029-30.

• Apparel and Textile Industry: Gains price competitiveness in the U.K. market through zero-duty access. Eg: Indian garments become more competitive against Bangladeshi or Vietnamese exports, enhancing market share in Europe.

• Gems and Jewellery Sector: Welcomes duty-free access for high-value products, boosting profitability. Eg: Indian jewellers can export gold and diamond jewellery to the U.K. with lower cost structures.

• Information Technology (IT) and Professional Services: Benefits from easier mobility and recognition of qualifications for professionals. Eg: Indian IT firms can deploy professionals to the U.K. more efficiently, with less visa friction.

• Indian Employers of Workers in the U.K: Gain from exemption from social security contributions for Indian workers temporarily in the U.K. Eg: Firms hiring Indian talent in the U.K. will save on mandatory contributions for 3 years, reducing costs and encouraging cross-border placements.

Why are Indian farmer organisations opposing the India-U.K. FTA?

• Threat from Imported Agricultural Products: Reduced tariffs on U.K. agri-exports like lamb, salmon, and dairy products may hurt Indian farmers. Eg: Cheaper U.K. lamb and salmon could enter the Indian market, undercutting local producers who already operate on thin margins.

• Concerns Over Low-Income, Low-Margin Conditions: Indian farmers fear intensified competition could worsen their already precarious economic situation. Eg: Many Indian farmers rely on traditional and small-scale farming, which cannot compete with heavily subsidised U.K. agriculture.

• Lack of Protective Mechanisms: The FTA lacks clear safeguards to protect Indian farmers from market shocks due to sudden import surges. Eg: No countervailing duties or quotas have been announced to cushion farmers from a flood of imported agri-goods.

How could the India-U.K. FTA influence future trade agreements with the European Union and the United States?

• Establishing a Negotiation Template: The India-U.K. FTA may serve as a reference framework for structuring future trade deals. Eg: If India agrees to liberalise tariffs on 85% of imports from the U.K., similar expectations may arise in talks with the EU and U.S..

• Precedent for Sensitive Sector Concessions: Concessions on agricultural and alcohol imports set a precedent for market access in sensitive sectors. Eg: The cut in whiskey and gin tariffs for the U.K. may lead to similar demands from U.S. bourbon producers or EU wine exporters.

• Pressure on Domestic Manufacturing and Policy: As India lowers duties and opens its markets, pressure may grow on its industrial and trade policy in upcoming FTAs. Eg: With less than 2% share in global exports, India’s manufacturing sector could be exposed if future FTAs follow the U.K. model without strong support policies.

Way forward: 

• Safeguard Vulnerable Sectors: Introduce protective clauses such as trigger safeguards, quotas, or phased liberalisation to shield Indian farmers and MSMEs from import surges. Eg: Gradual tariff cuts with review mechanisms for sensitive agri-products.
• Strengthen Domestic Competitiveness: Enhance manufacturing capacity, R&D incentives, and export infrastructure to fully capitalise on new market access. Eg: Support engineering and textile sectors with technology upgradation and logistics hubs.

Mains PYQ:

[UPSC 2024] The West is fostering India as an alternative to reduce dependence on China’s supply chain and as a strategic ally to counter China’s political and economic dominance.’ Explain this statement with examples.

Linkage: The India-UK FTA, and its potential use as a template for agreements with the EU and the US mentioned in article, can be viewed within the broader context of strengthening India’s economic and strategic ties with Western countries. This PYQ explores the reasons behind such partnerships, which provides a geopolitical backdrop to India’s trade negotiations with the UK and other Western nations.

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