By: Nantoo Banerjee
India, accounting for a meagre 2.4 percent of the world surface area, over 18 percent of the current world population and only three percent of global manufacturing output, should focus more on production than free trade agreements (FTA). The matter is relevant as the United Kingdom and European Union members are keen on inking such agreements with import dependent India to mainly expand the export of their products and services. In 2019, India had pulled out of the Regional Comprehensive Economic Partnership (RCEP) agreement, touted to be the world’s largest trade protocol between China and 14 other Asian countries, even after being part of the negotiations for seven years. The reason was that India was concerned about the fact that RCEP would promptly reduce merchandise import duties by 80-90 percent. And, that would further raise India’s large trade imbalances with China and expose domestic producers to greater foreign competition. It will hurt India’s manufacturing ambition.
Even without the RECP agreement, India’s trade deficit with China in 2021-22 rose to $72.9 billion, up from $44 billion in the previous year. India’s imports from China reached a record $57.51 billion in the first half of this year. Though the current FTA negotiation between the UK and India is expected to cause much less injury to India, it would be nice if the proposed deal focuses more on bilateral manufacturing cooperation to grow their respective production bases than merely grabbing the existing market at both ends. As of now, neither India nor the UK have much to sell to each other. The existing trade offers only limited items of export and import from both sides. Since Brexit, the UK has been looking for stronger trade ties with India. That is understandable. Last year, the UK had a trade deficit with the EU of £25 billion and a trade surplus of £7 billion with non-EU countries.
Lately, the UK-India relations have been elevated to a “comprehensive strategic partnership”, which is based on a shared commitment to democracy, fundamental freedoms, multilateralism and a rule-based international order. The bilateral trade between the two countries was limited to only $17.5 billion in 2021-22. During the pandemic year of 2020-21, the two way trade was worth only $13.2 billion. India’s exports stood at $10.5 billion in 2021-22, while imports were $7 billion. By entering into an FTA, the two countries aim to take the trade to $100 billion. This appears to be highly ambitious if not impossible to achieve in the current context unless the two countries work seriously to raise their manufacturing capacities sharply to compliment each other’s market demand instead of relying on the existing trade basket. Opportunities do exist. The emphasis on manufacturing will further expand them and help both the UK and India expand trade beyond their borders.
Going by the present pattern of trade, a UK-India FTA should provide a major thrust to India’s export from the labour sensitive sectors such as leather, textile, IT, ITES, jewellery, and healthcare. Last year, India’s exports to the UK were led by the machinery, nuclear reactors and boiler group amounting to US$1.06 billion. This was followed by the sections comprising pearls, precious stones, metals and coins ($964.55 million); electrical and electronic equipment ($885.59 million); pharmaceutical products ($638.57 million); articles of apparel, knit and crocheted ($612.01 million), and articles of iron and steel ($422.65 million) among others. The proposed FTA with the UK is likely to be a full-fledged one as against an earlier plan to have an interim deal first. The deal may cover more than 90 percent of tariff lines.
The UK was once a global leader in manufacturing. But, the collapse of its colonial empire led to its downhill journey in manufacturing. Today, the UK’s share of global manufacturing is only 1.8 percent, well below India’s 3.1 percent. A joint manufacturing programme will benefit both the countries and help the UK’s new prime minister and Tory party leader Rishi Sunak keep his promise to revive his country’s economy and generate more employment and income. India has already got a reasonably good industrial presence in the UK. According to Grant Thornton, around 850 Indian companies are operating in the UK, with combined revenues of over £41.2 billion. Together, they paid £461.8 million in corporation tax and employed 110,793 people. Technology and telecom sector companies dominate the list of fastest growing Indian outfits. Other important sectors are pharmaceuticals, chemicals, engineering and manufacturing. About 72 Indian companies showed at least 10 percent revenue growth in 2019. This exemplifies the contribution of Indian companies to the UK’s economy.
The government’s assessment of the existing FTAs and preferential trade pacts show that they are not quite favourable to India. Though India’s bilateral trade with partner countries such as Japan, South Korea and those in the ASEAN region improved noticeably following the signing of new trade deals, it benefited India little in terms of exports. On the contrary, the trade deals substantially helped the foreign partners push their exports to India leading to “unfavourable gains” to India’s trade partners, observed recently by NITI Aayog, the country’s public policy think-tank. This called for a more “fair and balanced” approach to new FTAs with complementary economies. As Union Commerce Minister Piyush Goyal himself felt, such agreements need to focus less on competition and more on collaboration. However, it may be easier said than done. For instance, India’s local wine, beer and “foreign liquor” (IMFL) manufacturers are already worried that they may substantially lose their domestic market to competition from cheaper and popular global brands from the UK.
The governments of both the UK and India would probably appreciate that manufacturing is a critical component for many product-focused businesses around the world. It is deeply linked with the foreign trade of Individual countries. Currently, India holds the fifth position among the world’s top 10 manufacturing countries after China, the US, Japan and Germany. However, while China shares around 29 percent of the global manufacturing output, India’s share is only a little over three percent. The share of the US is around 17 percent, Japan 7.5 percent, South Korea three percent, and Italy around two percent, France 1.9 percent, the UK 1.8 percent and Indonesia 1.6 percent. It does not make much sense for India to go for FTAs with countries that will further stifle its manufacturing sector in the face of low-duty imports. (IPA Service)