In a world economy experiencing a surge of trade disputes and concerns about slowing trade growth, the conclusion of the India-UK Free Trade Agreement (FTA) talks is an important achievement.
After 15 rounds of intense negotiations since January 2022, on 6 May this year, an agreement was reached in principle for a historic FTA. However, implementation will take some time, with the earliest likely date being in 2026. British Prime Minister Keir Starmer is due to visit India to sign the FTA later in 2025 and domestic ratification is required by both countries.
Mutual benefits
Trade negotiators on both sides deserve credit for inking a bilateral FTA providing for comprehensive coverage of goods and services trade. While the official text is yet to be published, the FTA seems to eliminate tariffs on nearly 99% of Indian exports to the UK, offering significant business opportunities.
The agreement could also deliver notable gains in services, with the UK offering ambitious market access commitments as well as easier movement of Indian professionals to the UK. Parallel ongoing talks on a Bilateral Investment Treaty (BIT) to protect investments between the two countries may be harder to conclude. Disagreements over dispute settlement mechanisms and investor protections could hamper progress on the BITs.
Nevertheless, this FTA aligns nicely with a rapidly growing Indian economy at over 6% per year in a world economy growing at half that speed, and with India’s stated vision of ‘Viksit Bharat 2047’ becoming a global economic growth pole.
For Britain, having a trade agreement signed with the US and India simultaneously is a signal that it has re-awoken to economic engagement post-Brexit through agreements with the two largest democracies and their markets.
Furthermore, it gives UK exporters and investors greater market access to Asia’s fastest growing economy. The UK’s outward foreign investment stock into India could rise from about $ 22 billion in 2023. More Indian students may also prefer to study in the UK compared to the US.
Significant in this deal is the geopolitical signalling. The FTA between the world’s fourth largest and sixth largest economies is taking place amidst increasing world economic uncertainty associated with the Donald Trump administration’s reciprocal tariff policies to operationalise the America First vision.
This has accelerated formerly lethargic discussions to conclude FTAs between like-minded countries interested in a freer trade and investment environment. The knock-on effect of this is already visible. The European Union (EU) and India started the 11th round of FTA negotiations on 12 May to conclude an early interim agreement to mitigate trade risks to the EU. An India-EU FTA as well as an India-UK FTA may support reformed global rule-making on international trade and perhaps even revive the World Trade Organization (WTO).
Gains for India
By itself, the India-UK FTA can yield four notable economic gains for India.
The first is deepening bilateral commercial ties. Lowering trade and regulatory barriers through the FTA will encourage specialisation and trade based on the comparative advantage between India and the UK.
India’s low labour costs and skills, for instance, gives it a comparative advantage in labour-intensive industries and some IT services. Already, total goods and services trade between India and the UK has grown rapidly, nearly doubling to $ 53.5 billion between 2018 and 2024. Assuming the bilateral FTA is implemented, this could rise by nearly 40% or another $ 32 billion by 2040 according to projections by the UK’s Department for Business and Trade, which uses sophisticated global computable general equilibrium modelling.
The second gain involves promoting global supply chain trade. India is a relatively small player in global supply chains, accounting for about 1.5% of exports in 2023. But supply chain pessimism on India seems to be abating with Apple’s response to navigating potentially high US tariffs on China, its main global manufacturing base.
In April, Apple announced plans to move the assembly of the bulk of its iPhones sold in the US to India by the end of 2026, thereby doubling its current production in India and moving away from China. The India-UK FTA offers the tantalising prospect of India eventually supplying the UK market as well and offers incentives for multinationals like Apple to invest in export-oriented Indian manufacturing capacity.
The third gain involves the benefits that will accrue to consumers and professionals on both sides. As tariffs fall under the bilateral FTA, consumer gains will arise with increased access to high-quality imports and lower prices.
Indian consumers will enjoy reduced costs on goods from the UK like whisky – of which India is already the world’s largest consumer – cosmetics, medical equipment, and advanced machinery, while consumers in the UK can expect lower prices on Indian imports including clothing, footwear, and seafood.
While details are not available, the FTA is additionally expected to facilitate the movement of Indian professionals to the UK for employment without altering the UK’s existing points-based immigration rules. Worker mobility was understood to be a sticking point in negotiations, with India aiming for higher quotas for categories of professionals, including IT workers.
Fourthly, the FTA is a stepping stone to India’s membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP, a high-standard, mega FTA that reduces trade barriers for members, and which India declined to join, makes up a large share of world trade. Its 12 members, including Japan and the UK, represent 15% of world trade and 15% of world GDP.
As Indian business gains experience and confidence with trading under the India-UK FTA, and as the bilateral evolves enabling closer economic integration, India can usefully study the economic benefits and costs of CPTPP accession. It provides access to multiple markets in one go, will benefit India from the China Plus One movement, and boost business for Micro, Small, and Medium-sized Enterprises (MSMEs), which amount to 40% of India’s exports.
This would be a continuation of the progressive FTA-led engagement strategy of the Indian Government, which has seen similar agreements take effect since 2021 with Australia, the UAE, the European Free Trade Association, and Mauritius.
Small steps forward
By itself, the India-UK FTA is an enabling condition for India’s advancement and influence in the world economy.
However, international experience suggests that actual geopolitical and economic gains will only accrue to countries that use FTAs as a springboard to undertake comprehensive economic reforms, tackle supply side challenges (such as investing in tertiary level technical skills and trade-related infrastructure), and provide business support services to promote the use of tariff preferences under FTAs.
Small steps have already been made; some states have undertaken reform of their stringent labour laws and made land available to industry. It is critical to activate India’s lax chambers of commerce and overcrowded education system to rigorously and sincerely prepare Indian youth for the new world that awaits them, which is theirs for the taking.
(This article was first published in The Indian Express)
(The writer is a Professorial Fellow in Economics and Trade at Gateway House: Indian Council on Global Relations, Mumbai and a Visiting Senior Fellow at ODI Global, London)