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India’s hesitancy to engage in FTA‘s, by and large, has been on account of high trade deficit with trading partners post the implementation of ASEAN, S Korea and Japan FTA/CECA. While the legitimacy of these concerns is questionable, the experience of South East Asian countries clearly points to the positive outcomes of FTAs in developing manufacturing capabilities and aligning with development/growth targets.
In the current context of the proposed FTA with UK, India’s negotiating agenda should clearly focus on pushing up India’s overall export capability. Considering the emerging challenges of increasing trade costs, higher incidence of non-tariff barriers, integrating technology with supply chains, digitization, sustainable and green technologies, the India-UK FTA provides opportunities for not only expanding India’s trade engagement with UK but also with the rest of the world given the trade complementarity between the two nations.
Structurally, there are significant differences in the economic indicators of UK and India as detailed in Table 1. The trade orientation (trade openness) of UK is significantly higher than India. Second, the share of services in GDP is much higher in UK relative to India, while the share of manufacturing and agriculture is relatively higher in India. However, ironically, UK’s exports of goods accounted for 54% of total exports to India, while services accounted for 46% of total exports. And third, the wide difference in GDP per capita indicates the prospects for higher growth in GDP for India relative to UK. With growth in income, the demand for high end goods and services is likely to increase faster in India. For India, the high income in UK entails a demand structure for value-added goods and services.
While the potential to expand trade in goods and services exists for both India and UK, translation of the same into actual trade flows will be determined by the tariffs and non-tariff barriers (NTBs). DIT estimates show that the simple average tariff faced by Indian exports to UK is 4.2% while it is 14.6% for UK exports to India. At a disaggregated industry level, the peak tariff applied by both UK and India are significant. For example, in UK, peak tariffs are high at 242% for prepared food, 124% for vegetable products, 103% for animal and vegetable products, 76% for chemicals, 10% for textiles,12% for footwear and 13% for vehicles. As against this, tariff peaks in India are more widespread across all industries ranging from 100 to 150% for food products, 70% for plastics, 100% for automobiles, 60% for miscellaneous manufactures besides tariffs ranging between 20-40% for all the other manufactures (DIT,2021). What this means is that negotiations on tariff reductions would lead to higher exports for UK relative to India. With low tariffs in UK, tariff reduction may not provide impetus to export growth for India.
However, what is of more important from India’s perspective is the high incidence of non-tariff barriers in UK, particularly for agricultural products. Quantitative assessment based on SMART simulations indicates only a 2% change in all agricultural exports (export competitive) of India to UK post the FTA. This would imply that India’s modest agricultural exports to UK are constrained by NTBs. The implication drawn is that when stringent technical standards (say MRL) are introduced in the importing country, it results in higher compliance costs for Indian firms/exporters, which in turn can make their products uncompetitive. This is evident in the declining and the low share of agricultural exports to UK. Between 2000-01 and 2019-20, the share of agricultural exports in total exports to UK declined from 14.4% to 7.85%. Among agriculture exports, high growth (value) is observed for fish, cereals, coffee/tea, fruits and vegetables &products. For these products, India’s major competing countries in UK are mainly EU countries and developing countries like Vietnam and Kenya.
Manufacture exports account for over 90% of India’s exports to UK. The high growth (value) exports are machinery, electricals, textiles, precious stones and leather items. India’s competing countries in UK are EU countries, USA, China, Bangladesh. Therefore, the possibility of India’s exports expanding in UK would depend on the tariff concessions provided to these countries relative to India.
A review of UK’s public consultations on FTAs with EU, US, Australia, New Zealand indicate that EU countries have been offered zero tariffs across all products, 10 TRQs for agricultural products to US, GSP for developing and LDCs. Vietnam is likely to enjoy tariff preferences under GSP and CPTPP. EU countries with extensive subsidies under Common Agriculture Policy (CAP) can stand to gain for agricultural products. Moreover, across all prospective FTAs, UK’s commitment is to implement food quality standards and other technical standards. Therefore, countries that can meet these standards are likely to get better market access.
Projections on a zero-tariff regime in both India and UK indicate a higher growth of imports from UK estimated at US$2.1 billion as the tariffs in India are higher than compared to UK. The estimates show UK imports will substitute wines &spirits from France and automobiles from Germany. As India is not a major exporter for UK, the extent of trade gains will depend on how India develops new competitive products and on the concessions accorded to EU, US, Vietnam and Bangladesh by UK. While there are possibilities of enhancing India’s services exports to UK, investment opportunities also exist for chemicals, fertilisers, pharmaceuticals, food processing, telecom and petroleum.
In the light of these trade dimensions, for the FTA negotiations between India and UK, the following issues may become important from India’s perspective. First, as UK’s tariff reductions may not lead to significant increases of exports for India, higher market access opportunities can be realized only if NTBs are addressed. India should work towards drawing up Mutual Recognition Agreements (MRAs). To mitigate the high compliance cost, India can explore the possibilities of UK’s investments in Food Processing, Machinery, Pharmaceuticals with the objective of technological upgradation and implementing Good Manufacturing Practices (GMP). Additionally, India would also require institutional interventions for certifications. In this regard, the Digital Global Identity Systems for supplier verification & certification, based on Blockchain can be developed with UKs assistance. This is particularly beneficial to the industries dominated by SMEs as brought out by the experience of Canada. Second, the focus of investments from UK should be on enhancing R&D capacity of Indian manufacturing. For this, the UK industries may be encouraged to engage in the PLI Scheme with a focus on electronics and textiles. Third, as India exports mainly manufacturing intermediates while UK exports final goods, the give and take in the FTA may necessitate reducing the tariffs for automobiles and spirits. In this regard, pointed industry consultations may provide the feasibility of tariff reduction in exchange for technological partnerships. Fourth, the bilateral relationship in services trade needs to be strengthened for both UK and India. And lastly, the FTA with UK need to be taken up as a continuum for the FTA negotiations with EU.
(This article is authored by Dr Sunitha Raju, Professor, Indian Institute of Foreign Trade, Delhi, on an invitation to contribute to ETRise Top MSMEs ’21 program. Illustrations by Sadhana Saxena)
To participate in ETRise Top MSMEs ’21 program,