India-UK FTA: Whiskey, sarees and Jaguars

India’s exports will benefit from the elimination of 99% of the UK’s import duties

After three and a half years of negotiations, India and the UK concluded a historic free trade agreement (FTA) on May 6. Under this deal, India will reduce tariffs on 90 per cent of tariff lines, with 64 per cent eligible for immediate tariff-free imports from the UK. On the other hand, India’s exports will benefit from the elimination of 99 per cent of the UK’s import duties.

The UK-India FTA has come at a strategically beneficial time for both countries. At a time when the world is succumbing to protectionism and tariff wars, this comes with a unique opportunity to reform and reset its trade ecosystem, positioning India as a reliable trading partner for developed nations. With the European Union and US FTAs expected to conclude this year, India has a great opportunity to establish a clear standard and template to fully capitalise on these landmark agreements.

India is the UK’s 12th largest trading partner, while the UK ranks as India’s 16th largest trading partner, with total trade amounting to $56.7 billion in 2024, 60 per cent of which is in services. Alongside the FTA, India and the UK have agreed to negotiate a Double Contribution Convention Pact, which would exempt Indian professionals on short-term assignments in the UK from contributing to social security schemes in the host country. They and their employers can continue with social security schemes run by the Employees’ Provident Fund Organisation (EPFO) in India while working abroad. This will boost job opportunities for Indian professionals in the UK by reducing the additional cost of £500 per employee per year for employers.

India is expected to benefit from the elimination of tariffs on 99% of goods. Indian exports in sectors such as textiles, leather, footwear, auto parts, and gems and jewellery are expected to benefit from duty-free access to the UK’s markets. Previously, textiles and apparel exports faced a 12% duty in the UK, whereas India’s competitors, Bangladesh and Vietnam, enjoyed duty-free access. While this FTA will create a more level playing field for Indian exports, India must enhance its competitiveness in this sector to compete with Bangladesh (which holds a 15 per cent share in the UK’s textiles and clothing imports) and Vietnam.

Whiskey imports from the UK currently face Indian tariffs of 150 per cent, which will be reduced to 75 per cent immediately and to 40 per cent by year 10. While Scotch whiskey accounts for only 2.5 per cent of the Indian whiskey market, it will offer affordable choices for Indian consumers. The UK car manufacturers will benefit from a quota that reduces tariffs from over 100 per cent to 10 per cent, making British luxury brands like Jaguar Land Rover, Bentley and Aston Martin slightly more accessible to Indian buyers.

Globally, the UK is the third-largest exporter of scrap iron, while India is the second-largest importer. In India, scrap iron is used as a raw material in steel production, particularly in electric furnaces. In 2023, scrap iron contributed 20 per cent to the domestic steel sector’s feedstock. India aims to increase this share to 50 per cent, as it is a key step towards its green steel initiative. Currently, India’s ferrous scrap imports are subject to a 21 per cent import duty. Official communications from both India and the UK have not explicitly mentioned scrap iron, but there is optimism that the import duty may be further reduced.

One potential area of contention is the UK’s Carbon Border Adjustment Mechanism (CBAM), which aims to prevent carbon leakage. India, however, asserts its right to retaliate against any additional tax imposed on its exports, viewing it as green protectionism. However, India can find ways to collect a similar levy domestically, and it can avoid the carbon tax on the UK’s borders when it is introduced in 2027.

While this FTA can be seen as the right step towards setting benchmarks for a fast-paced FTA and transparent customs procedures, India must also reform its sectors to enhance competitiveness to maximise the benefits from these FTAs. India’s track record of FTA utilisation has been limited, with a rate of only around 25 per cent compared to 70-80 per cent in developed countries. This means that India must do a lot of work at home so that its exports perform well outside. Also, there are no tariff cuts on dairy, cheese, apples and other sensitive agricultural items this time. In the long term, India may have to cut loose of its protectionist stance in future FTAs, especially with partners like the US. Meanwhile, the India-UK FTA can work as a blueprint for India’s future FTAs. 

(Anisree is a research associate at the Takshashila Institution and Shikha is an independent researcher)