India, UK successfully reach Free Trade Agreement; 'Historic milestone' says PM Modi

India and the UK on Tuesday confirmed the completion of a "landmark" multi-billion-pound trade deal, which locks in reductions on 90 per cent of tariff lines and is expected to add 4.8 billion pounds annually to the British economy by 2040. Prime Ministers Narendra Modi and Keir Starmer are said to have had a “very warm” phone call to agree the Free Trade Agreement (FTA), which will now go through the process of legal text formalisation to be approved by the British Parliament before it comes into force. "Today we have agreed a landmark deal with India – one of the fastest growing economies in the world, which will grow the economy and deliver for British people and business,” Starmer said in a statement. The deal was finalised by Commerce and Industry Minister Piyush Goyal during his talks with UK Business and Trade Secretary Jonathan Reynolds in London on Friday.

For the UK, the biggest wins being highlighted are Scotch whisky tariffs set to be halved from 150 to 75 per cent and automotive tariffs set to fall from 100 to 10 per cent under a quota. According to the UK Department for Business and Trade (DBT), besides whisky and gin, tariff reductions have also been achieved on products such as medical devices, advanced machinery and lamb. Based on 2022 trade statistics, the department claims this amounts to India cutting tariffs worth over 400 million pounds when the deal comes into force, which will more than double to around 900 million pounds after 10 years. "By striking a new trade deal with the fastest-growing economy in the world, we are delivering billions for the UK economy and wages every year and unlocking growth in every corner of the country, from advanced manufacturing in the North-East to whisky distilleries in Scotland,” said Reynolds. “In times of global uncertainty, a pragmatic approach to global trade that provides businesses and consumers with stability is more important than ever,” he said.

The FTA is expected to increase bilateral trade, which stands at 41 billion pounds a year, by an additional 25.5 billion pounds, with UK wages up by 2.2 billion pounds each year in the long run. "FTAs are notoriously complex, and this truly is a remarkable achievement that will serve both countries well. This agreement represents a significant milestone in UK-India relations, underscoring the potential of our partnership and the opportunities that lie ahead,” said Manoj Ladwa, Founder and Chairman of UK-based policy platform India Global Forum (IGF). One of India’s key demands around a Double Contributions Convention will ensure that professionals in either country are not forced to pay national insurance or social security contributions in both countries. On professional visas, the UK stressed that there would be no change to the UK immigration policy except to offer a more streamlined process for business mobility. India has also succeeded in additional categories such as chefs, musicians and Yogis for the UK’s professional visa routes. India and the UK had restarted negotiations on an FTA this February after a pause in the three-year negotiations for general elections last year. An accompanying Bilateral Investment Treaty (BIT), which was also being negotiated in parallel, has not gone over the line at this stage, but UK officials indicated that it is hoped that it will conclude soon too.

India finalised a free trade agreement with the UK, its 16th so far as the country aimed at boosting bilateral trade and investments. The other regions and countries with which India has signed such agreements include the four-nation European bloc EFTA, Japan, Korea and Australia. Since 2014, the country has signed five such agreements with Mauritius, the UAE, Australia, EFTA and the UK. Together, these trade pacts ensure preferential relationships with over 90 countries.

What is an FTA?

A free trade agreement is an arrangement between two or more countries where they agree either to end or reduce customs duties on the maximum number of goods traded between them, besides cutting down non-trade barriers on a significant value of imports from partner countries and easing norms to promote services exports and bilateral investments. The subjects covered under these pacts range between 10 to 30. Across the globe, over 350 FTAs are currently in force and most of the nations have signed one or more such agreements.

Types of trade pacts:

Terms like FTA, PTA or RTA are sometimes used interchangeably to describe these agreements. The WTO (World Trade Organisation) uses the abbreviation RTA (Regional Trade Agreement) to denote all types of preferential economic engagements. The 166-member Geneva-based organisation is the global watchdog for exports and imports-related issues. India has been a member since 1995. If two or more countries agree to reduce or eliminate duties on a specified number of goods, it is termed a preferential trade agreement (PTA) or Early Harvest Scheme (India-Thailand). Certain agreements are also named CECA (Comprehensive Economic Cooperation Agreement - India-Singapore) or CEPA (Comprehensive Economic Partnership Agreement - India-Korea) or BTIA (Bilateral Trade and Investment Agreement - India-EU) or TEPA (Trade and Economic Partnership Agreement). These comprehensive or new-age agreements include subjects like goods, services, investments, intellectual property rights, government procurement, trade facilitation, trade remedies and customs cooperation.

Benefits of FTAs:

• Zero-duty entry into partner country markets helps in the diversification and expansion of export markets.

• Level-playing field vis-a-vis competitors who may have already entered FTAs with partner countries.

• FTAs enable preferential treatment in the partner country market over non-FTA member country competitors.

• Such pacts attract foreign investment to stimulate domestic manufacturing.

• They allow access to raw materials, intermediate products and capital goods for value-added manufacturing.

• Help achieve long-term efficiency and consumer welfare goals.

India's FTAs:

India has inked trade deals with Sri Lanka, Bhutan, Thailand, Singapore, Malaysia, Korea, Japan, Australia, UAE, Mauritius, the 10-nation bloc ASEAN (Association of Southeast Asian Nations), and four European nations' bloc EFTA (Iceland, Liechtenstein, Norway, and Switzerland). In addition, India is negotiating trade agreements at present with a number of its trading partners. The negotiations are underway with the US, Oman, the European Union (EU), Peru, and Israel. Talks with Canada for a similar pact were put on hold due to certain political issues.

Meaning of zero duty in FTA:

If zero duty is notified for a product under an FTA, does it mean it will enter India without paying any duty?

No. Zero duty here means zero basic customs duty. However, other applicable duties, which are mostly in the nature of domestic taxes are to be paid. These may include 'IGST' (integrated goods and services tax) and 'Special welfare cess. Each FTA contains a list of items on which no duty is reduced. Such lists are known as exclusion, negative or sensitive lists. This list is different for each agreement. A few items that figure in these lists of many of India's FTAs are select vegetables, fruits, spices, dairy and auto. Free trade agreements provide for a periodic review after their implementation to sort out key issues among the signatory parties. At present, review talks are on between India and Korea.