UK-India free trade agreement predicted to boost India's GDP growth by 0.25%, according to Elara Capital
The India-UK Free Trade Agreement (FTA), signed by Commerce Minister Piyush Goyal and UK Secretary of State for Business and Trade Jonathan Reynolds, marks a significant milestone in India's trade relations with developed nations. This is the first major FTA signed by India with a developed nation.
The FTA aims to reduce tariffs on goods such as textiles, whisky, and cars, among others. India's advantage in labor-intensive exports like textiles and footwear could give it an edge over regional competitors like Bangladesh and Vietnam. The agreement is also expected to boost India's gems and jewellery exports to the UK, with post-FTA exports expected to double.
Two-way trade between India and the UK stood at $21.9 billion in 2024. The FTA is projected to enhance bilateral trade by an estimated $34 billion each year. The benefits of the FTA are expected to be significant over time, according to economist Garima Kapoor, who predicts an immediate 10-15 basis point jump in India's GDP growth over the next two years. Over the next five years, the FTA could boost India's economic growth by up to 25 basis points.
Free Trade Agreements (FTAs) are formal arrangements between two or more countries to reduce or eliminate customs duties, tariffs, quotas, and other trade barriers on goods and services traded between them. FTAs also often address non-tariff barriers, investment protections, intellectual property rights, labor standards, and dispute resolution mechanisms.
India has signed 16 FTAs so far. These include deals with countries such as Japan, South Korea, Australia, the UAE, Mauritius, and blocs like the European Free Trade Association (EFTA). The FTA with the United Kingdom is the most recent addition to India's trade strategy for enhancing exports and attracting investment while aligning with global economic trends.
The benefits of FTAs include zero or reduced duties on imports and exports, enabling companies to expand and diversify their markets. Preferential treatment over competitors from non-FTA countries creates a level playing field. Attraction of foreign investment stimulates domestic manufacturing and economic growth. Access to raw materials, intermediate goods, and capital goods at lower costs facilitates value-added production. Lower compliance costs due to harmonized standards and streamlined cross-border procedures further strengthen the economy. Additionally, FTAs help in strengthening strategic economic ties and diplomatic relations among partner countries.
The India-UK FTA could serve as a blueprint for future trade negotiations, including a potential agreement with the United States. As FTAs become more prevalent in India's trade strategy, their impact on the economy is expected to be substantial.
- While the India-UK Free Trade Agreement (FTA) focuses on reducing tariffs on goods, it also aims to boost investment opportunities, particularly in sectors like gems and jewellery, where India expects post-FTA exports to double.
- With the India-UK FTA signed, India's advantage in labor-intensive exports like textiles and footwear is expected to provide an edge over regional competitors in the global market.
- FTAs, such as the one between India and the UK, help in attracting foreign investment, stimulating domestic manufacturing, and facilitating value-added production by providing access to raw materials, intermediate goods, and capital goods at lower costs, thus fostering economic growth.
