With Elections Behind Them, the U.K. and India Resume Trade Talks

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A swarm of drones make an Indian flag in the sky over New Delhi, India, on Jan. 29, 2022.

The United Kingdom and India will soon resume talks to finalize a free trade agreement (FTA) that could lower tariffs and enhance market access for goods and services; however, negotiations will face challenges due to U.K. immigration and climate policies affecting Indian workers and imports, respectively, which could outweigh the benefits of tariff reductions in a prospective trade deal. Since January 2022, India and the United Kingdom have been working toward finalizing a comprehensive trade agreement. However, negotiations were put on ice in March in light of upcoming elections in both countries, with India holding general elections in April-June, followed by the United Kingdom's general ballot on July 4. According to Indian and U.K. government officials, now that both elections are over, trade talks are set to resume, with negotiators from both sides reportedly set to hold the next round of talks later in July to address pending issues and finalize their FTA, which media reports suggest could happen as early as October.

Indian Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP) secured a historic third consecutive term in office after winning India's 2024 general election, which was held between April 19 and June 1. In the United Kingdom, the opposition Labour Party comfortably won the country's July 4 general election as expected, ending 14 consecutive years of Conservative Party rule.
The draft U.K.-India FTA reduces tariffs on trade between the two countries and encompasses 26 chapters covering goods, services, investments and intellectual property rights. The United Kingdom and India completed the 13th round of negotiations in December 2023, with the 14th round commencing in January 2024. The two countries are concurrently negotiating a bilateral investment treaty as well.

India and the United Kingdom are both interested in finalizing the FTA because it can boost their economies through increased trade and job creation, diversify supply chains away from China, and enhance each other's credibility as a trading partner. In its 2024 campaign platform, the U.K. Labour Party stated its commitment to advancing efforts to ink a free trade agreement with India. And since winning control of the U.K. government in the July 4 election, there are signs the party is already seeking to make good on this pledge: just 2 days after taking office as U.K. prime minister, Labour leader Keir Starmer spoke with Modi on the phone, where he reportedly affirmed that London was ''ready to conclude'' a trade deal with New Delhi ''that works for both sides.'' Furthermore, at the India Global Forum held in the United Kingdom on June 24-28, Labour lawmaker and now U.K. Foreign Secretary David Lammy expressed an intent to visit New Delhi ''within a month'' of a prospective Labour government being formed, as well as a desire to secure a trade deal with India that the Conservative Party failed to complete when it was in power. Starmer and Lammy's remarks showcase the priority the new U.K. government places on finalizing an FTA with India, which aligns with the Labour Party's pledge to boost the U.K. economy by increasing trade volumes and creating jobs. Indeed, according to the United Kingdom's Department for International Trade, such a deal could potentially increase the value of annual U.K. exports to India to 16.7 billion pounds ($21.7 billion) by 2035, up from 15.8 billion pounds ($20.5 billion) in 2023. For India, such a trade deal would be its most ambitious to date, underscoring the country's efforts to position itself as an attractive destination for investors as part of New Delhi's push to diversify India's supply chains and reduce its dependence on China. India's service sector also stands to gain significantly from an FTA, especially given the United Kingdom's prominence in IT and financial services. Additionally, finalizing an FTA with the United Kingdom could give momentum to India's ongoing efforts to reach a trade deal with the European Union by providing a negotiation template and enhancing India's credibility as a trade partner.

Total bilateral trade between India and the United Kingdom rose to $21.34 billion in the fiscal year 2023-24, up from $20.36 billion in 2022-23 and $17.5 billion in 2021-22. According to the United Kingdom's Department for International Trade, an FTA with India would facilitate easier and cheaper trade for U.K. exporters while improving choice and value for U.K. consumers. Such a deal would also establish stronger pathways for Indian investors, supporting industries and creating opportunities for workers throughout the United Kingdom. By pursuing an FTA with India, the United Kingdom is seeking enhanced market entry for its transport equipment, medical devices, chemicals, electrical products, wine and spirits, and automotive parts.
For India, FTAs are crucial tools to boost trade and investment. India has already signed over 18 trade agreements with countries including Japan, Korea, Singapore, Thailand, Sri Lanka and Malaysia. By pursuing an FTA with the United Kingdom, India aims to secure improved access to the U.K. market for its textiles, food and beverage products, tobacco, leather and footwear, and agricultural goods such as rice. India is also looking to increase its service sector's access to the U.K. market, especially IT and financial services). Additionally, the United Kingdom is the largest European source of remittances to India and a large source of foreign direct investment, which makes it a strategically significant partner for India. Signing an FTA with the United Kingdom would further enhance these economic ties and contribute to India's economic growth and diversification efforts.

Despite their shared interest in finalizing an FTA, the United Kindom and India are unlikely to do so in the coming months due to outstanding issues regarding immigration and environmental policies. But the new U.K. government will likely prove more open to compromise than its predecessor, increasing the overall prospect of an eventual deal. Issues regarding the United Kingdom's immigration policies, particularly concerning Indian service sector workers, will remain a key sticking point in negotiations. India has expressed concerns that Indians working temporarily in the United Kingdom on business visas must pay national insurance, despite not being eligible for U.K. pensions or social security benefits. But given the United Kingdom's political climate, where immigration remains a highly contentious issue, London will likely negotiate limits to the visa issuance to Indian workers, constraining the finalization of a trade deal. Additionally, India will likely face challenges posed by the impending introduction of the United Kingdom's carbon border adjustment mechanism (or CBAM) in 2027, which will impose a carbon-based levy on imports of emissions-intensive goods such as iron, steel, aluminum, fertilizers, hydrogen, ceramics, glass and cement from countries with weaker climate legislation, like India. For India, compliance with stringent carbon emission standards under the United Kindom's tax regime may require significant investments in technology and infrastructure upgrades, posing financial burdens on Indian businesses. This could undermine the tariff concessions agreed upon in the FTA, which could disadvantage certain Indian exports in the U.K. market and constrain India amid sustainability requirements. Disputes over the United Kingdom's CBAM, as well as over its aforementioned immigration rules, will likely stall progress once U.K.-India trade talks resume, suggesting that a deal may be unlikely in the coming months. However, the Labour government's commitment to finalizing a deal may make it more open to compromise than its predecessor, increasing the likelihood that London and New Delhi still ultimately reach a deal, even if it takes time to do so. U.K. negotiators could, for example, offer to ensure social security benefits for Indian workers, or agree to a visa quota (i.e. a predetermined number of U.K. visas that would be issued to Indian nationals within a specific period, establishing a framework to manage and regulate their entry into the United Kingdom). London may also offer exemptions from the CBAM on certain Indian goods covered in the two countries' trade deal.

Key U.K. demands include tariff reductions for Scotch whisky, which currently faces a 150% duty, along with electric vehicles and chocolates. London is also seeking increased opportunities for U.K. services in Indian markets, particularly in sectors such as telecommunications, legal services and financial services. India, on the other hand, wants provisions that would allow its professionals to live and work in the United Kingdom under renewable work visas, along with market access for several goods with reduced or zero customs duties.
In trade negotiations with London, New Delhi has also expressed concerns that Indians working temporarily in the United Kingdom on business visas must pay national insurance despite not being eligible for U.K. pensions or social security benefits.
How to incorporate labor, environment, gender and intellectual property rights into the FTA will also prove a thorny issue in negotiations, given that India has traditionally been hesitant to include these areas in trade agreements due to the significant domestic policy adjustments they often require and compliance for companies.