India-UK relaunch negotiations for free trade agreement. What threatens it

Negotiations were put on hold last year as both countries held general elections. For British PM Keir Starmer, a deal with India is part of his plan to revive the UK economy.

File photo of Prime Minister Narendra Modi with UK Prime Minister Keir Starmer | Photo: ANI

New Delhi: India and the UK Monday announced the resumption of negotiations for a free trade agreement (FTA), but larger questions remain whether the two governments would be able to bridge the yawning gap this time around.

Negotiations for the trade deal began in 2022, with an original goal to be completed by October 2022, which was agreed to by Prime Minister Narendra Modi and former Prime Minister of the UK Boris Johnson, during the latter’s visit to India in April of that year.

People familiar with the matter pointed out that at least three-fourths of the agreement had been agreed to by the end of 2022, however differences remained on substantive measures including in areas such as services, manufacturing of specific goods and legal mobility.

After 2 years and 14 rounds of negotiations, the previous Conservative Party led-government in London and New Delhi were unable to come to a final agreement. Negotiations were put on hold last year, as both countries went through general elections respectively.

In the UK, the Labour Party led by Keir Starmer stormed to power after 14 years in opposition. With the new government in place, Jonathan Reynolds, the UK Secretary of State for the Department of Business and Trade is in New Delhi for a 2-day visit from 24 February to 25 February to relaunch FTA negotiations.

Trade between the two countries stood at $21.33 billion in 2023-2024. India maintains a trade surplus with the UK, with exports being significantly higher than imports.

Piyush Goyal, the Indian Minister for Commerce and Industry said that the FTA would be a “win-win” to meet the aspirations of the people in India and the UK at a press conference Monday after the two governments agreed to relaunch negotiations for the agreement.

“In what is an increasingly volatile and multipolar world, India is a vital partner for the UK…What binds us together even further is our shared ambition through championing free and open trade and investment to drive jobs and growth across both of our countries,” said Reynolds during the press conference.

Goyal declined to comment on a deadline for the deal, saying that it “is never too early or never too late to conclude a good agreement”. Reynolds highlighted that there is some “urgency” for the completion of the trade deal.

There have been reports that immigration to the UK was a stumbling block for the two countries, but Goyal rejected the claim saying that “immigration has never been a part of trade negotiations anywhere in the world”. However, both Goyal and Reynolds explained that the two sides are looking at short-term legal or business mobility, which they tried to differentiate from immigration during the press conference.

Legal mobility for Indian workers to the UK was a major stumbling block for the Conservative Party, given that it had spent years campaigning on anti-immigration policies, including former Prime Minister Rishi Sunak’s “Rwanda Plan” which included sending illegal migrants to the African country. Immigration was also one of the key areas, which saw the British electorate vote to leave the EU in 2016.

The India-UK FTA for Starmer is a part of his primary focus of bringing jobs to the UK and to strengthen its economy, explained Shairee Malhotra, Deputy Director, Strategic Studies Programme at the Observer Research Foundation (ORF) to ThePrint.

The issues facing India-UK trade deal 

For New Delhi and London, negotiations over access to British automobiles to the Indian market, social security exemptions, access for certain premium goods, services and legal mobility remain areas with large differences.

India does not normally allow for corresponding market access for services, a person familiar with the matter told ThePrint. Furthermore, any agreement on exemptions to social security payments in countries like the US and the UK would require a number of concessions from India, the person said.

“The issue surrounding automobiles is a part that would require compromise from both nations. Before the negotiations were put on hold, around 90 percent of the FTA had been agreed to, which include specific tariff reductions for British alcohol and cars by India,” said Malhotra.

The other contentious domain is the services sector. For India, services constitute a large part of its gross domestic product (GDP) and are critical for the economy. This points to New Delhi’s reluctance to compromise in this sector, pointed out Malhotra.

The other worry for New Delhi is London’s plans to introduce a carbon border adjustment mechanism (CBAM) by 2027. The CBAM is a border tax, which London wants to introduce on energy intensive sectors including aluminium, cement, ceramics, glass, iron and steel, to name a few sectors.

Malhotra points out that CBAM is a policy that worries India and its implementation in 2027 in the UK, combined with the EU’s plans to roll out the tax next year, will impact any potential FTA. Goyal has criticised the EU’s CBAM in the past, claiming that Brussels has “irrational standards” and unfair trade practices, which has impacted FTA negotiations.

“India has in the past few years attempted to get FTAs done. For London, there is really no other deal as important as the one with New Delhi. Both India and the UK are looking to each other for an agreement. There is the political will, but it still requires a major push to see it completed,” said Malhotra.

(Edited by Zinnia Ray Chaudhuri)