Will Christmas Spell Cheer at Downing Street?
[Sidharrth is a Partner at JSA. The following article was published in The Indian Express and on Lexology.]
The India-UK free trade agreement (FTA), one of the topmost priorities for the Indian bureaucracy at work, was ready for sign-off at Diwali. However, the definitive plans were derailed by the sudden resignation of the then UK Prime Minister, Liz Truss. All eyes are now tensely focused on whether her successor, Rishi Sunak, the first Indian-origin prime minister of the UK, will bring fresh energy to the India-UK FTA, which has been stalled by the change in UK’s leadership.
The positive sentiment and zeal around the India-UK FTA are as ambitious as is the commitment to double bilateral trade by 2030. It is worth noting the exciting watch-and-chase between the respective governments on the preferred personal stance on aspects such as the Ukraine crisis, given that the outgoing PM Boris Johnson was a strong supporter of the Ukrainian President, Volodymyr Zelensky. Similarly, the New Delhi corridors have been closely monitoring how the new British government pushes forward in respect of the Indo-Pacific region.
The last six chapters of the 26-chapter talk on trade agreement touched a sensitive timeline where both sides deal with what remains uppermost in their trade aspirations. Cases in point are consensus to be reached in respect of automobiles for the UK while for India the issues remain mobility of professionals and students, and bolstering labour-driven sectors such as leather, textiles, jewellery, agricultural and marine products, pharmaceuticals and healthcare.
The British have been passionately aspiring to wrestle with the hiccups that the UK has been encountering while exporting to India. Smoother access to the Indian consumer's wallets has also stirred excitement. Added to their wishlist are significant tariff cuts for whisky and cars, and more penetration into digital and legal services.
The agenda has more: the UK is also excited to explore transport, electricals, medical devices, chemicals, motor parts, fruits, vegetables, etc. Similarly, the Indian list of trade aspirations also mentions exporting food and beverages, textiles, tobacco, leather and footwear, and agricultural items.
Historically, ever since Brexit, India and the UK have been striving to strengthen their ties. These efforts have been directed towards 'strategic partnership' based on 'democracy', 'fundamental freedom', and a rule-based 'international order'.
During Boris Johnson's visit to India this year, both sides were interested in expanding the existing defence and security partnership in addition to the UK setting up an India-centric general export licensing regime to reduce the delivery time for defence-related procurements.
To fortify the forces at play, the UK parliament has set up a cross-party panel – 'India (Trade and Investment) All Party Parliamentary Group (APPG)' to foster ongoing negotiations and achieve the goals on the anvil.
In addition to the APPG, the duo has also set up a committee that will focus on discussing a totalization agreement sought by New Delhi, which will ease the social security compliances for Indian IT companies as also eliminate dual social security taxation. Further, India seeks market access to the UK legal services sector to reciprocate the same entry by way of liberalization of the Indian counterpart.
Is India Inc. Ready?
A crucial point that the cross-party committee has also claimed was India's readiness in terms of law, culture, and regulatory aspects, which will need a sea change to adapt to the new objectives being laid out in the FTA. Given India's "historically protectionist policies," any change in the legal and regulatory undercurrents could lead to a longer timeframe for ease of doing business in India under the FTA.
In addition, concerns cited about businesses that require so-called "facilitation payments", complex tax and business setup, contract enforcement aspects, limited IP scopes, etc. are also low-level benchmarks.
The House of Commons International Agreements Committee has questioned the timelines for the India-UK FTA's conclusion. It stressed the possibility of haste leading to missing out a good deal and merely achieving ambition over valuable content.
Not A Cakewalk!
The India-UK FTA's success depends on many factors protected by the respective nations, and its global trade exposure has been kept under wraps. Hence, both countries will face significantly sensitive barriers in respect of action being in the spirit of the FTA. For instance, India’s highly protected sectors such as wines and automobiles are the subject of much debate. Similarly, enabling easy entry norms for students and professionals in the UK will be fraught with difficulty.
Secondly, both the nations need to arrive at a common ground in terms of product standards and technical qualifications of their varsities. Without considerable manoeuvring to this end, the FTA could never achieve aspired outcomes.
Thirdly, India's aggressive approach towards signing up FTAs worldwide and now with the UK also showcases a clear picture of what it expects from the trading systems in addition to access to the assets of its vital services sector.
Window Shopping of FTAs?
Since Britain's exit from the European Union (EU), the UK has been on a fast-paced dialogue with nations like India to sign trade deals and agreements. Currently, the UK would have completed about 68 such deals, including one with the EU. Similarly, the Indian powerbrokers have struck trade deals with Mauritius, Australia, and the UAE while being in talks with the EU, Canada, and other nations.
India’s economic necessities ended its decade-long break from FTAs, leading to a sudden splurge that endowed it with the stature of one of the world’s nations most engaged in FTAs. It has come full circle in its FTA trajectory with the numerous negotiations it has signed within two years, including deals with Singapore, Malaysia, Japan, Korea, and the ASEAN (Association of Southeast Asian nations). With the spirit and encouragement drawn from the Look East Policy, these have been an obvious show of strength by India over the years.
Nonetheless, the Indian industry stakeholders and policy authorities have several concerns, given the sharp rise in imports in comparison to exports.
Protectionist Fears - The Interplay
It is relevant to remember that, over the last decade, several protectionist fears stemmed from negotiations with the EU, Australia, and Canada that were not in full swing. Further, the best litmus test may be quoting the withdrawal from the Regional Comprehensive Economic Partnership (RCEP) - an agreement involving the ASEAN economies, Australia, Japan, Korea, China, New Zealand, and India back in November 2019.
Understanding the 'Knee Jerk'
Scrutiny of the trigger to this sudden U-turn on FTAs as also similar trade deals and agreements has revealed that while several economic and geo-political factors may engulf India, the major critical pointers have been safeguarding supply chains and diversifying its sources. Hence, India has chosen to dilute its reliance on FTAs and focus on diversifying its sources overall.
COVID-19 has been a timestamp for the world to learn anew. Globally, nations have known that essential products and the grasp over their supply chains are a key in the world’s ever-changing scenario today. This undoubtedly led to an impetus in the overall thought process to look outwards, disrupting the traditional trade channels that existed erstwhile.
Secondly, COVID-19 also led to several geo-political disturbances, such as the US-China conflicts, which caused tremors worldwide, engendering a multipolar world comprised of country alliances of varied shapes and sizes. However, India has succeeded in becoming an active member in new forums such as the Quad and Indo-Pacific wireframes, and has affinity to the G7, given its common grounds of supply chains, clean energy, etc.
Geo-Politics in the Absence of Geo-Economics?
Recently, India has been focusing on many geo-political developments in the Indo-Pacific with distinct flair and adequate exposure. It has moved centre stage by setting aside the military aspects of the Quad. It has also ensured that the ASEAN states are comfortable with the power dynamics in progress.
Where is New Delhi Going Wrong?
In simple terms, notwithstanding the aggression geo-politically, the Indo-Pacific geo-economic metrics are a major dampener. Clearly, the machinery has turned a blind eye to the inevitable bridges between geo-politics and geo-economics concepts. As a result, irrespective of how strong India may be on its physical boundaries, it has reverted to the same old sauce with regard to the economics attached.
Steering towards the Indo-Pacific and the Quad in a celebratory manner while nodding out from the region's critical multilateral trade agreements determines how the two undercurrents are not complementing each other. India's refusal of the Indo-Pacific Economic Framework (IPEF) is a US-sponsored soft trade mechanism. This came about a couple of years after India had backed out of the negotiations on the RCEP, which went into effect earlier this year. Both agreements are critical milestones in determining the region’s economic souls.
Therefore, the question that arises is: by staying out of the IPEF and RCEP, is New Delhi extending an explicit handshake to bilateral agreements alone?
The Plus in a Bilateral Brush of Powers Only
First is the apparent fear of domination by Chinese markets in times to come. If this were to happen, it is preferable to be prepared to face the challenge head on, even if this entails incurring costs in the short term. Irrespective of the military stand-off on the LAC, India-China trade has only escalated. It is therefore better to deal with the issue more comprehensively. India could consider multilateral trade arrangements that may or may not involve a Chinese presence.
Secondly, opting to stay out of IPEF was not in India’s best interest as it will be challenging for the country to merge itself into regional and global supply chains without being an element of the crucial regional multilateral trading agreements.
Thirdly, India has no option other than to address the challenges that create hassles for investments in India. Though a handful of international firms may have closed their operations in China due to tensions with the US, yet they have not turned to India for their new setups, opting instead for Vietnam. This is fair warning that India is yet to gear itself for such opportunities. Being a part of multilateral trading arrangements will pave the way for rewarding participation.
Fourthly, India will need to take a call on its approach toward a grand maritime strategy. Given that it cannot rely only on military forces, it needs to get the regional states to create economic stakes in India with reciprocal effect. China has done this successfully. This again calls for India to tie up with central non-regional states and integrate with their supply chains.
Clearly, securing trade agreements between the UK and India will strengthen the economic links between the two nations, helping both recover lost ground in key services that suffered from the pandemic. At the same time, the power dynamics on both sides must be carefully assessed.