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A trade deal with India would be a big achievement – but achieving one may remain elusive

Sam Lowe

Sam Lowe

3 min read

Of all the countries on the UK government’s free trade agreement hitlist, India is the most intriguing.

The combination of India’s size, relatively closed economy, and high external barriers to trade – the Department for International Trade estimates that United Kingdom exports to India faced an average tariff of 18.7 per cent in 2021, up from 13.4 per cent in 2016 – mean the potential gains from trade liberalisation are greater than with, say, Australia, where UK exports face an average tariff of around 3 per cent.

As well as reducing tariffs, UK industry will be hoping for any trade deal to address a number of regulatory barriers to trade. A leaked 2018 UK-India joint trade review provides a useful list of priority areas. These include the difficulties faced by UK chemicals firms navigating complex Indian approval processes and an ever-changing list of requirements and authorisation procedures for UK sellers of medical devices. For services trade, opaque licensing requirements and investment restrictions create difficulties for lawyers and accountants looking to enter the Indian market.

In the digital space, India is making it harder and harder for firms to store data outside of its borders and operate in the country without a local headquarters. Examples include forcing firms to store payments data on servers in India, whether the initial payment was processed outside of India or not; electronic know-your-customer requirements that insist that the associated technological infrastructure exists locally; and plans to expand the definition, and subsequent restrictions on the cross-border transfer, of “critical personal data”.

India also routinely threatens to apply duties to cross-border data flows. Yet while identifying trade restrictions is (relatively) easy, removing them is not.

First, there is the issue of whether a deal is actually doable, or not. India has a checkered history when it comes to trade liberalisation and concluding free trade agreement negotiations – most recently it dropped out of the RCEP negotiations (a trade deal between China, Japan, Indonesia, Australia and 11 others) at the last minute.

There will also be resistance to Indian trade demands from some in the UK. With UK tariffs on Indian imports being (largely) already low, due to India benefiting from the UK’s unilateral preference scheme for developing countries, India’s aggressive interests lie in the services space. Sometimes wrongly framed as a request for freedom of movement, India is particularly interested in locking in preferential labour mobility arrangements for its services firms, allowing them to temporarily send managers and experts into the UK to deliver contracts and oversee investments.

The biggest barrier to Global Britain, the Home Office, will inevitably object. Even if a deal is reached, there is a limit to what can be realistically achieved. Many of the issues facing foreign firms in India stem from India’s federal nature. This means that federal-level initiatives can be easily undermined by state action. For example, a tariff reduction on imported alcohol could end up being offset by an increase in a state’s excise duty.

Or to put it another way, a trade deal with the UK is not going to turn India into a functioning single market overnight. But that’s not to say there would not be tangible benefits at the margins. A trade deal with India would be a big deal for the UK. And who knows, maybe this time is different.

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