India-UK post-Brexit ties will depend on UK’s willingness to accept labour movement

India’s ties post-Brexit will depend on the UK’s willingness to accept movement of labour.

India and the United Kingdom have been close allies for a long time. The bilateral relationship between the two countries were upgraded to a strategic partnership in 2004, and were further strengthened by former PM David Cameroon’s visit to India in 2010 and 2013. PM Modi’s visit to the UK in November 2015 took the relationship to new heights. The situation has changed since June 2016 when nearly 52% of the population of the UK decided to leave the European Union, reversing the decision taken in 1975 to join the common market. However, trade relations between the two countries continue to flourish and more recently so with the visit of the PM Theresa May in November this year. Bilateral trade between India and the UK was $ 14 billion in FY16, which was slightly lower than the previous year’s total trade of $14.33 billion. The UK continues to be among India’s major trading partners. During FY16, the UK ranked 12th in the list of India’s top 25 trading partners moving up six places from 18th in 2014-15. Despite the global economic slowdown and the Eurozone crisis, India-UK bilateral trade has been resilient. In fact, the UK’s share in India’s global trade has gone up from 1.89% in FY15 to 2.18% in FY16. On the same lines, the EU is also India’s largest trading partner with 13% share in 2015. India was EU’s ninth largest trading partner in 2015 with 2.2% share.

Similarly, India-UK bilateral investment ties have continued to remain strong. UK continues to be the third largest investor in India after Mauritius and Singapore with a cumulative FDI investment of $23.10 billion between April 2000 to March 2016. UK also ranks first among the G20 countries and accounts for around 8% of all FDI into India for the period April 2000 to March 2016. Its two-way traffic as India is also one of the largest source markets for FDI projects in the UK. India received $24.91 billion in FDI equity inflows from EU between April 2012 and May 2015. Thus, the EU along with the UK both remain important to India. According to the annual report of UK Trade and Investment (UKTI), India undertook 122 projects in FY15 in the UK making it the third largest source of FDI accounting for over 9,000 new jobs in FY15. Given the good trade and investment relations between the two countries, an India-UK FTA has been on the anvil since 2006 with several rounds of discussions and no concrete outcomes. However, it is being opined by Indian industry that the FTA could be easier to accomplish at a bilateral level following Brexit. Given strong cultural and historical ties with India, as a part of the FTA, India expects the UK to consider easing global movement of skilled professionals to facilitate greater investment from Indian firms. Services are an area of comparative advantage for India, and it expects liberalisation of Mode 4—movement of people especially skilled professionals. However, this could prove to be difficult given the fact that anti-immigration sentiments played a significant part in Brexit. Further, if an FTA is negotiated, UK may be compelled to lowering tariffs on goods in some agro products of interest to India that it currently imports from other EU countries where existing tariffs are high. The two countries would also need to negotiate non-tariff barriers faced by Indian exporters as well as make Indian exports comply with UK standards. On the other hand, a high-level forum has identified six major areas ripe for collaboration: smart cities and the digital economy; health care and hygiene; education, manufacturing, defence and security; financial and professional services; and making it easier to do business.

According to a study carried out by the Commonwealth Secretariat post-Brexit vote a well negotiated FTA between the UK and India has the potential to increase bilateral trade by 26%. The Secretariat has also identified 13 new products which India can export. It has estimated market access of around $2 billion for these 13 products. India and the EU have been negotiating an FTA since 2007, without conclusion. The talks have continued since the Brexit referendum; however India has made it clear that these negotiations will have to be re-visited once the UK leaves the EU. As there is no India–EU FTA, the tariffs facing India and the UK in each other’s markets have been high. Tariffs on the UK exports into India are estimated to be around 14.8% on average, while Indian exports into the UK face tariffs of around 8.4%. The highest tariffs faced by the UK’s exports are in beverages and spirits (113%), followed by coffee and tea (82.5%) and vehicles (31%); the highest tariff on India’s goods is for dairy products (36.6%), followed by tobacco and its products (around 36%).

Over the years, the UK’s membership of the EU may have acted as an obstacle to developing trade and investment partnerships with the rest of the world. However, post Brexit vote it is expected that the UK will be in a better position to forge closer trading ties. However, the Indian commerce ministry has made it clear that India and the UK can work on a FTA only after the latter is officially out of the EU, but the two countries have set up a joint working group to deliberate upon ways to strengthen commercial relationship. This is because the content of the India-UK FTA will depend on the kind of deal and terms of exit Britain negotiates with the EU and UK is not allowed to sign a FTA with India as long as it’s a part of the EU. Both the UK and EU are equally important for India. So there is no evidence that the UK and India could reach an agreement any more quickly than the current India-EU BITA, which is currently under discussion. Moreover, it is very likely that Indian businesses will deny access to the EU market since Britain would have to leave the single market so it can control European migration. This could lead to decline of interest in Indian businesses to invest in the UK. The situation is complex as India is likely to insist on inclusion of Mode 4 in the FTA, and if the UK is interested in a trade deal with India it will have no option but to be flexible on Mode 4 and open up its immigration.

Political drive and willingness on both sides to keep the relationship strong and reach further heights would certainly outweigh the uncertainties arising from Brexit. There is immense potential for enhancing not only trade and investment between the countries but several opportunities in other areas of cooperation as well.

This article first appeared in The Financial Express, on 16 December 2016. Like other products of the Brookings Institution India Center, this report is intended to contribute to discussion and stimulate debate on important issues.