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Indian deadlock: Rishi Sunak's mission to strike a free trade deal

Rishi Sunak met the Indian Prime Minister Narendra Modi at the G20 summit last year (Alamy)

Tom Sasse

Tom Sasse

7 min read

Rishi Sunak has prioritised boosting trade with India, but negotiations appear to be moving slowly with both sides unwilling to risk domestic opposition. Tom Sasse reports

Two days after becoming prime minister, Rishi Sunak lit the diyas at a Downing Street reception for Diwali. The symbolism was not lost in India: 75 years on from the end of colonial rule, Britain had not only its first Hindu prime minister, but the first of Indian descent – one of Sunak’s grandparents was born in Ludhiana in the state of Punjab.

Indians around the world celebrated the appointment – including Narayana Murthy, the billionaire founder of Infosys, dubbed “the father of the Indian IT sector”, whose daughter Akshata is Sunak’s wife. On one of his first calls, to Indian prime minister Narendra Modi, Sunak described himself as a “visual representation” of the bond between the two countries.

It is a bond that Sunak wants to strengthen: he has made agreeing a free trade deal with India his top trade policy objective. The economic rationale is obvious. India overtook the United Kingdom as the world’s fifth largest economy last year and overtook China as the world’s most populous country last month.

Lord Bilimoria, a British Indian businessman and founder of Cobra beer, has called India “the fastest train in the world”, set to be its third largest economy by the end of the decade. British businesses want to get on board: they already employ around 800,000 people in India, as it gets richer its huge market will be an increasing pull.

Since Brexit, India and other Commonwealth countries have become more important to Britain’s economy – albeit far from making up for the huge fall in trade with the EU, as some Brexiteers promised. Trade between the UK and India was around £34bn last year, more than double the figure in 2016, making India the UK’s 12th largest trading partner.

“Fundamentally it’s a tricky place to start that India’s biggest offensive interest is the UK’s most sensitive defensive one”

Migration has increased, too, with workers from India replacing some of the lost EU migrants in hospitals and businesses, helped by a new partnership signed in 2021. Indians now account for the largest share of UK visas – with 118,000 students and 103,000 workers arriving in the year to June 2022.

Yet Sunak’s focus on India marks a continuation of the UK’s post-Brexit trade strategy (if that is not too grand a term). The broad aim has been to demonstrate the benefits of new freedoms by securing shiny free trade agreements.

Having given up on a much-hyped US trade deal, the UK signed agreements with Australia and New Zealand. Both were widely criticised: former environment secretary George Eustice said the UK “gave away far too much for too little in return”. They were in any case of “minor economic significance”, says David Henig, a trade expert.

More recently the UK joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an agreement spanning 11 countries – although it already had bilateral agreements with most of them.

A deal with India – a vastly bigger and faster-growing economy than Australia or New Zealand – could be a much larger prize, says James Kane, a former official who is writing a history of UK trade policy. The government thinks it could be worth around £3.3bn by 2035 – a small fraction of GDP, but worth a try given the headwinds the UK faces.

There are obvious benefits for India, too. Its biggest goal is to increase opportunities for Indians to study and work abroad, which would boost skills and increase the revenues that flow back in remittances. It also remains a highly protected market and Modi has stressed the need to improve access to foreign investment and supply chains. India could be a major beneficiary of a wider “decoupling” of the West and China, as companies look for new places to invest.

But many still regard it as “not a good place to do business”, says another former official, partly because the Indian justice system is not trusted – a fact underlined in February by tax authorities raiding the BBC’s offices in Mumbai and Delhi after the broadcaster produced a documentary that was highly critical of Modi. Ben Ramanauskas, a former trade adviser to Liz Truss, highlights that UK businesses are put off by having to grapple with rules that date back to the 1990s.

Despite the potential benefits, and hopes that Sunak might accelerate progress, talks don’t appear to moving quickly. After 15 months, the eighth round took place in March: there has been some progress but major sticking points remain including protections for British businesses, access to India’s services market and visas.

Experts point to several problems. “India has had a very very sceptical approach to trade liberalisation for decades,” says Dmitry Grozoubinski, a former trade negotiator and founder of ExplainTrade. Talks with the EU have been happening on and off since 2007, with little sign of progress.

While Modi may be keener than his predecessors on opening up, he still faces strong internal opposition and could see a deal as too risky with an election approaching. A strong brand of populist politics in India casts international trade rules as biased towards the West. Powerful lobbies like the rice industry oppose ceding any ground lest it set a precedent.

India’s powerful civil service has also strongly opposed expanding trade in general, let alone signing free trade agreements. “India doesn’t negotiate particularly deep or convincing trade deals,” says Henig. “It’s loath to negotiate the type of deal the UK wants.”

The UK, in turn, will struggle to give India what it wants. “Fundamentally it’s a tricky place to start that India’s biggest offensive interest is the UK’s most sensitive defensive one”, says Kane. India wants progress on what is known in trade jargon as “mode 4 services entry” – essentially the ability of an Indian professional contractor, like a software engineer, to come and work in the UK.

Awkwardly this has long been a prize for companies like Infosys, of which Narayana Murthy remains chairman emeritus and in which Akshata Murthy retains a £690m stake. But it runs up against the sensitivity of the immigration debate in the UK. As Trade Secretary Kemi Badenoch recently told an Indian newspaper: “We left the EU because we didn’t believe in free movement… [we’re] not negotiating some kind of free movement with India.” There could be room for flexibility, for instance on quotas for skilled workers, but it is not clear that the UK has even yet agreed to this being on the table. 

With politically difficult trade-offs to work through on both sides, the prospect of an ambitious deal this year is receding. “There’s a lot of scepticism that this will get over the line,” says Henig. The most likely outcome appears to be a shallow interim deal, similar to the one India signed with Australia last year, with the possibility of a fuller free trade agreement after elections, due to be held in both countries in 2024.

Sunak has demonstrated a capacity for pragmatism and statesmanship on the world stage, as well as an appetite for detail, far beyond either of his predecessors. In September he will be in India for a G20 summit – set to be his first visit as Prime Minister to the country of his grandparents. It will be a big moment. Could he find a way to land another deal?

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