India-UK FTA | Government gives Aatmnirbharta a silent burial

India and the United Kingdom have ‘concluded’ the long-awaited free trade agreement (FTA), which is expected to be signed soon after a few remaining issues are sorted out.

The UK government has called it a ‘huge economic win for the UK’ and published its expected gains; India has not.

The UK estimates an immediate reduction of £400 million in import duties. The UK’s annual exports are estimated to grow by an additional £15.7 billion (59% higher than historical trend growth) by 2040; India’s by £9.8 billion (25%), wiping out the current Indian surplus of £8.4 billion.

Why so much generosity to the UK, turning ‘Aatmnirbharta’ on its head? What is India’s gain?

Deal favours UK

India has granted big concessions which it was refusing steadfastly for the last 25 years.

Import tariffs on whiskey and gin have been slashed by 50% immediately, and to 40% in the 10th year. Tariffs on automobiles will be brought down from 100% to 10% (subject to a quota). Many other goods — medical devices, cosmetics, salmon, etc. — will also receive significant concessions.

India will treat UK bidders/suppliers at par with Indian businesses in government procurement, subject to a condition of minimum value addition of 20%.

The UK has eliminated a 10% tariff on textile products but has not granted concessions on sugar, rice, eggs, etc., which India has been demanding for a long time.

There is one seemingly major concession. Temporary Indian workers of Indian companies in the UK will not have to pay social security contributions (about 20% of salary; maximum estimated Rs 4,000 crore or £350 million per annum). The UK has, however, not granted any additional work visas. Moreover, Indian workers who do not make social security contributions will not be entitled to the UK’s health service and other benefits.

The UK government expects tariff concessions to aggregate to about £1 billion in a few years. India’s gains may not equal 10% of the UK’s gains. Likewise, how many workers would stop paying social service contributions is not determinable now.

The gains for the UK are big and real, the gains for India are small and unclear.

Indian consumers will benefit

Indian consumers have long been deprived of many quality foreign-made products and have had to pay very high prices. The FTA dismantles most of these constraints. Indians will be able to buy British-made automobiles (Land Rovers, Bentleys), medical devices, and drink UK-made liquor at ‘reasonable’ prices. Consumers will benefit.

If this approach is carried out with the US and EU FTAs, the global bazaar will come to India for consumers’ delight.

A good incentive for Indian businesses to become competitive

The FTA deal can make Indian industry and businesses competitive in various ways.

First, Indian government contracts, estimated to be about $400 billion a year — in high technology and capital-intensive sectors like telecom, renewable energy, semiconductors, railways, roads — are being opened to UK companies. These sectors can benefit from new technologies and foreign investments, leading to the elimination of delays in execution, improving the quality of services, and bringing down high costs for governments.

Second, the opening of automobiles to UK industries will shake up Indian industry, more so if followed up with similar concessions to the US and the European Union (EU). Indian companies, as they lose price and purchase preferences, reservations and protections, and face-up with the foreign challenge, would have to invest massively in new technologies to compete or join them.

Third, the alcohol industry will witness a big transformation. Reduction of tariffs will drive down the prices of foreign-made imported liquor (FMIL), generating a massive increase in demand. The UK makers of Chivas Regal have announced a new plant in Maharashtra and are already ramping up a UK facility. The Indian made foreign liquor (IMFL) industry is highly taxed, though its business and profits are protected. Faced with competition, the IMFL industry would have to produce better products and compete. The state governments would have to reduce exorbitant excise duties on domestic producers.

In the longer run, many foreign companies will set up manufacturing plants across many sectors in India. A lot of mergers and buy-outs can also be expected. Indian industry will shape up and become much better.

Aatmnirbharta is dead

The UK trade deal is surprisingly quite unrepresentative of the DNA of the Narendra Modi-led Bharatiya Janata Party (BJP) government.

The deal is indeed a big U-turn — from import bans, subjecting foreign products to tough domestic value addition conditions, raising import tariffs all the time, putting non-tariff barriers, and reserving government procurement to Indian suppliers, to almost completely dismantling import tariffs and audaciously opening government procurement to foreigners.

The reasons for the government’s big U-turn have not been made clear. There has also been no public shift in visible intellectual arguments of Aatmnirbharta and ‘vocal for local’ from government officials or the BJP/RSS think-tanks.

As long as the government makes sound economic policy, which is good for the country, it does not matter. If the government carries it through in the US and the EU FTAs, it might be a second 1991 moment for India.

It will be better if the government publicly owns the shift instead of remaining silent and abandoning woolly ideas of Aatmnirbharta and rooting for ‘vocal for global’ (vasudhaiva kutumbakam).

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.