Vishleshan for Regulatory Exams, 25 July 2025: India-UK Trade Agreement

To get ready for the UPSC, RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss the India-UK Trade Agreement. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

India-UK Trade Agreement

Context: Lovers of Scotch whisky and imported cars have reason to cheer, but the duty benefits will unroll over the years—and in the case of automobiles, there will be stiff quotas on how many vehicles can be imported at lower duty.

Link to the Article: Mint

India and the United Kingdom have signed a landmark Comprehensive Economic and Trade Agreement (CETA), marking a significant reset in their bilateral economic relations. This ambitious free trade deal, one of India’s most wide-ranging and the UK’s most expansive in the Indo-Pacific post-Brexit, aims to boost trade in goods and services, facilitate investments, and unveil a joint roadmap for cooperation through 2035. While promising cheaper goods and expanded market access, the agreement also highlights areas of contention and the complex balancing act of protecting sensitive domestic sectors.

Free Trade Agreement (FTA) and Other Trade Arrangements:

Free Trade Agreement (FTA):

• World Bank/IMF: An FTA is an agreement between two or more countries where members agree to eliminate tariffs, quotas, and preferences on most (if not all) goods and services traded between them. Each member country maintains its own independent trade policies with non-member countries.
• WTO (General Agreement on Tariffs and Trade – GATT Article XXIV): Permitted under GATT Article XXIV, an FTA involves the liberalization of “substantially all trade” among two or more member economies.

Other Arrangements:

• Preferential Trade Agreement (PTA): A looser form of trade agreement where members agree to reduce tariffs on certain agreed-upon products but do not necessarily eliminate them across the board. It’s a stepping stone towards an FTA.
• Bilateral Trade Agreement (BTA): A general term for any trade agreement between two countries. It can range from a PTA to a comprehensive FTA. The India-UK CETA is a type of BTA.
• Comprehensive Economic Partnership Agreement (CEPA): A broader and deeper form of FTA, typically covering trade in goods, services, investment, competition, intellectual property rights, and other areas of economic cooperation. It aims for a more integrated economic partnership. India has signed CEPAs with countries like Japan, South Korea, and the UAE.
• Comprehensive Economic Cooperation Agreement (CECA): Similar to CEPA, it often includes broader areas of economic cooperation beyond just trade and investment, such as customs cooperation, standards, and regulatory harmonization.
• Customs Union (CU): Members eliminate internal tariffs among themselves and adopt a common external tariff policy towards non-member countries. This is a deeper integration than an FTA.
• Common Market: Builds on a Customs Union by adding free movement of factors of production (labour and capital) among member countries.
• Economic Union: The deepest form of economic integration, involving a Common Market plus harmonization of economic policies (e.g., monetary and fiscal policies). The European Union (EU) is an example.

Why does a country sign an FTA with another country?

• Increased Market Access: To gain preferential access to the partner country’s market through reduced tariffs and non-tariff barriers, boosting exports.
• Economic Growth: Stimulate trade, investment, and economic activity for both partners.
• Lower Consumer Prices: Imports become cheaper, benefiting consumers with lower prices and greater choice.
• Enhanced Competitiveness: Increased competition from imports can force domestic industries to become more efficient and innovative.
• Attract FDI: A stable and predictable trade environment can attract Foreign Direct Investment.
• Supply Chain Integration: Facilitate integration into global value chains.
• Strategic Alliances: Deepen political and strategic ties with partner countries.
• Setting New Rules: FTAs often include “higher-grade provisions related to intellectual property, investment and services liberalisation, and environment and sustainable governance (ESG)”. These can set new standards.

List of countries with whom India has signed such deals:

• Comprehensive Economic Partnership Agreements (CEPAs):
  • Japan (2011)
  • South Korea (2010)
  • UAE (2022)
• Free Trade Agreements (FTAs) / Broader Economic Agreements:
  • ASEAN (2010 – Goods; 2014 – Services & Investment)
  • Sri Lanka (1998)
  • Nepal (2009)
  • Bhutan (2017)
  • Mauritius (2021)
  • Australia (ECFTA – 2022)
  • EFTA (European Free Trade Association – signed in 2024, expected to be ratified)
  • UK (CETA – signed in July 2025, awaiting ratification).
• Preferential Trade Agreements (PTAs):
  • MERCOSUR (2009)
  • Afghanistan (2003)
  • Chile (2007)

Salient Highlights of the India-UK FTA (CETA):

The India-UK CETA is described as “among the most wide-ranging deals ever concluded by India” and the “most expansive trade pact signed by the UK in the Indo-Pacific after it left the European Union”.

This is the most comprehensive trade agreement that India has signed with any major developed country. Both sides aim to double bilateral trade by 2030 from the current level of nearly $56 billion.

Goods Trade Liberalization:

• Indian Exports to UK: Nearly 45% of India’s exports to the UK will now enter duty-free. This significantly boosts India’s labour-intensive sectors.
  • Tariffs on Indian processed food fall from 70% to zero.
  • Immediate duty drops on most Indian goods, including engineering products, chemicals, base metals, and marine items (from 8-20% to zero duty).
  • Specific gains for Indian seafood, textiles, leather footwear, and gems and jewellery (duty-free entry).
  • Marine exporters are major gainers, with UK duties dropping from up to 20% to zero, opening a $5.4 billion opportunity.
  • Engineering exports to UK projected to nearly double over the next five years, crossing $7.5 billion by 2029–30 due to up to 18% tariff elimination.
  • India gained preferential access to the UK’s $37.5 billion agri-market.
  • Indian Safeguards: New Delhi safeguarded sensitive sectors like dairy, fresh apples, and vegetable seeds from tariff concessions. India also kept gold bars, smartphones, blue-veined cheese, walnuts, and specific agricultural items out of concessions.
• UK Exports to India (Cheaper British Goods):
  • Tariffs on UK’s cosmetics (soaps, perfumes, shaving creams, nail polish), chocolates, and medical devices will drop from an average of 20% to around nil.
  • Automobiles: India allows UK to ship up to 20,000 completely built units (CBUs) in the first year at 30% duty (against current 110%), depending on engine capacity. Quota expands to 37,000 CBUs by year five and then tapers to 15,000 by year 15.
    • Electric/Hybrid/Hydrogen Vehicles: No concessions in the first five years. After that, India allows up to 4,400 premium EVs in the sixth year at 50% duty, reducing to 10% by year 10 (limited to vehicles priced above £40,000 CIF). A cap of 22,000 total vehicles over 15 years remains.
    • This model benefits luxury vehicles and protects India’s mass-market auto segment and EV localization push. This is the first time India has included automobiles in an FTA for tariff liberalization.
  • Alcoholic Beverages: For Scotch whisky, brandy, and rum, the 150% duty will be halved over 10 years for products meeting a Minimum Import Price (MIP) threshold of $5 per litre or $6 per 750 ml bottle. This is a market access gesture for premium brands.
  • UK Safeguards: The UK shielded its dairy, semi-milled rice, solid cane sugar, and several processed meat items.

Services Trade and Mobility:

• Legally Binding Commitments: Includes “legally binding commitments on services, investment, government procurement, and intellectual property”.
• UK Financial/Professional Services: Gain “guaranteed market access and equal treatment under India’s investment rules”.
• Indian Services Market Access: India opened several critical services segments to British firms, offering “unprecedented access” in sectors like accounting, auditing, financial services (FDI cap in insurance retained at 74%), telecom (allowing 100% FDI), environmental services, and auxiliary air transport.
• UK Firms’ Operating Ease: UK firms can offer telecom, construction, and related services in India without needing to set up a local entity, enjoying “national treatment”.
• Professional Qualifications: India agreed to recognize UK professional qualifications in select areas like law and accounting (legal services remain closed). No numerical caps on UK service providers; commercial presence rights granted across several domains.
• Indian Mobility to UK: India is allowed to send up to 1,800 professionals annually (chefs, yoga instructors, classical musicians) to work temporarily in the UK.
• Social Security Pact (DCC): The Double Contribution Convention (DCC) ensures employees temporarily working in the other country pay social security contributions only in their home country for up to three years, benefiting around 75,000 individuals.
• UK’s Cautious Offer: The UK’s offer on services is “more cautious,” with “limited liberalization beyond select areas”.
• Post-Study Work Visas: The agreement does not restore post-study work visas for Indian students, which “remains a point of contention” for Indian students.

Investment and Other Commitments:

• Fresh Investments: Expected to deliver fresh investments worth nearly £6 billion from the UK into India. Rolls-Royce and Airbus announced new aviation contracts and joint manufacturing deals.
• Institutional Mechanisms: Sets up mechanisms for cooperation in customs procedures, rules of origin, and digital trade.
• UK-India Vision 2035: Both leaders unveiled this broad strategic roadmap outlining cooperation in defence manufacturing, border security, climate action, and education. A Defence Industrial Roadmap has been launched. They also pledged deeper coordination on technology, intelligence sharing, and tackling organized crime.

Contentious Carbon Border Tax (CBAM): The agreement kept out the UK’s contentious carbon border tax. However, GTRI’s Ajay Srivastava noted that India has “not secured a carve-out or exemption clause on CBAM,” implying the UK can impose carbon taxes on Indian steel and aluminium from January 2027, creating a “serious asymmetry” as India grants UK goods duty-free access. Similar treatment is expected under India-EU FTA.

Analysis of the Article: Decoding the India-UK CETA

The India-UK CETA represents a pivotal moment for both nations, marking a significant step towards enhanced trade and strategic cooperation, while also revealing the complexities of modern trade negotiations.

1. A Win-Win Narrative, but with Nuances:

• Both Prime Minister Narendra Modi and UK Prime Minister Keir Starmer described the deal as a “win for their nations”.
• Benefits for India: Substantial market access for its labour-intensive sectors like textiles, seafood, and gems and jewellery. This aligns with India’s export-led growth ambitions and job creation.
• Benefits for UK: Cheaper access to Indian markets for cosmetics, chocolates, medical devices, and potentially high-end automobiles and spirits. Access to India’s services market and investment opportunities.

2. Strategic Balancing of Sensitive Sectors:

• India’s Safeguards: India successfully safeguarded its sensitive agricultural sectors like dairy, fresh apples, and vegetable seeds, and kept out products like gold bars, smartphones, and specific agri items.
• UK’s Safeguards: The UK also shielded its dairy, semi-milled rice, solid cane sugar, and processed meat items.
• Automobiles & Liquor as a “Significant Shift”: India’s inclusion of automobiles and alcoholic beverages under a tariff liberalization framework for the first time in an FTA marks a “significant shift”. The quota-based model for cars protects India’s mass-market auto segment and EV localization push.

3. Services and Mobility: A Mixed Bag:

• Indian Services Gaining Access: India has opened “unprecedented access” in critical services sectors like accounting, financial services, telecom, and environmental services for British firms, with national treatment.
• Limited UK Liberalization and Mobility: The UK’s offer on services is “more cautious,” with “limited liberalization beyond select areas”. The exclusion of broader mobility categories like business visitors and IT professionals, and the non-restoration of post-study work visas for Indian students, remain “points of contention”.
• Social Security Benefit: The Double Contribution Convention (DCC) is a key benefit for Indian professionals temporarily working in the UK, exempting them from dual social security contributions for up to three years.

4. Investment and Strategic Cooperation (Vision 2035):

• Fresh Investments: The FTA is expected to deliver nearly £6 billion in fresh investments from the UK into India, with new aviation contracts announced by Rolls-Royce and Airbus.
• UK-India Vision 2035: Both leaders unveiled this strategic roadmap for cooperation in “defence manufacturing, border security, climate action, and education,” including a Defence Industrial Roadmap.

5. Omission of CBAM as a Missed Opportunity for India:

• No CBAM Carve-Out: According to GTRI, India “has not secured a carve-out or exemption clause on CBAM (Carbon Border Adjustment Mechanism),” which is a “vital opportunity to protect our carbon-intensive exports”.
• Serious Asymmetry: This means from January 2027, the UK can impose carbon taxes on Indian steel and aluminium while India grants UK goods duty-free access, creating a “serious asymmetry.” Similar treatment is expected under the India-EU FTA.

In conclusion, the India-UK CETA is a comprehensive trade deal designed to significantly boost bilateral economic engagement. While it opens up substantial market access for Indian goods and services and includes forward-looking provisions on investment and strategic cooperation, the limited liberalization on mobility from the UK and the absence of a CBAM carve-out for India highlight areas where the deal falls short of some of India’s aspirations, setting a precedent for future FTAs.

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