India–UK Free Trade Agreement (FTA)
Context

• The India–UK Free Trade Agreement (FTA) negotiations have hit fresh hurdles, primarily due to the UK’s proposed Carbon Border Adjustment Mechanism (CBAM) or carbon tax.

Background

• The India–UK FTA negotiations were formally launched in 2022, as part of efforts to deepen economic cooperation and boost bilateral trade. 
• As per data from FY 2023–24, the trade volume between the two countries reached $21.34 billion, an increase from $20.36 billion in the previous fiscal year. 
• Presently, goods exported from India to the UK face an average import duty of 4.2%. 
• The two sides are now aiming to conclude an FTA, a Bilateral Investment Treaty (BIT) and a social security agreement termed as the Double Contribution Convention Agreement (DCAA).

Key Demands of India

• India has been pushing for greater market access for its products, particularly in labour-intensive sectors such as textiles, garments, gems, and jewellery.
• India has called for liberalisation of the UK’s visa regime to allow movement of skilled professionals from Information Technology (IT), IT-enabled services (ITeS), and healthcare sectors.
• India has also demanded special provisions for Micro, Small and Medium Enterprises (MSMEs) and requested flexibility regarding carbon emission standards.

Key Demands of UK

• The United Kingdom is keen on reducing tariffs imposed by India on high-value items such as Scotch whisky, electric vehicles, chocolates, and lamb meat. 
  • It is also seeking market access in telecom, legal, insurance, financial services.
• The UK is pressing for a sunset clause in the proposed Bilateral Investment Treaty and greater flexibility on issues like data localisation and the recognition of its new carbon tax regulations.

 

Carbon Border Adjustment Mechanism (CBAM) – It is a proposed environmental tax that aims to put a carbon price on certain goods imported into the United Kingdom, based on the carbon emissions generated during their production.  – It is designed to level the playing field between domestic producers (who must comply with the UK’s strict climate regulations) and foreign exporters from countries with weaker or no carbon pricing mechanisms.

CBAM and India’s Concerns

• The UK’s draft CBAM legislation, effective January 1, 2027, imposes levies on high-emission imports like cement, steel, aluminium, fertilisers, hydrogen.
• The emission calculation will follow the UK’s domestic Emissions Trading Scheme.
• Indian concern: CBAM undermines the principle of Common But Differentiated Responsibilities (CBDR) in climate negotiations.

India’s Response to CBAM

• India has proposed a “Rebalancing Mechanism,” which would require the UK to compensate Indian industries for losses incurred due to the carbon tax.
• India has emphasised that its Carbon Credit Trading Scheme (CCTS), which is based on emission intensity rather than absolute emission levels, is more suitable for a developing economy.

Key Highlights of the India-UK FTA:

• The FTA with the UK is a modern, comprehensive and landmark agreement which seeks to achieve deep economic integration along with trade liberalisation and tariff concessions.
• The FTA ensures comprehensive market access for goods, across all sectors, covering all of India’s export interests. India will gain from tariff elimination on about 99% of the tariff lines covering almost 100% of the trade value offering huge opportunities for increase in the bilateral trade between India and the UK.
• The FTA provides positive impact on manufacturing across labour and technology intensive sectors and opens up export opportunities for sectors such as textiles, marine products, leather, footwear, sports goods and toys, gems and jewellery and other important sectors such as engineering goods, auto parts and engines and organic chemicals. This will substantially improve Indian goods competitiveness in the UK vis-a-vis other countries.
• The FTA will have significant positive gains for employment in India.
• India will benefit from one of the most ambitious FTA commitment from the UK in Services such as IT/ITeS, financial services, professional services, other business services and educational services, opening up new opportunities and jobs.
• The FTA eases mobility for professionals including Contractual Service Suppliers; Business Visitors; Investors; Intra-Corporate Transferees; partners and dependent children of Intra-Corporate Transferees with right to work; and Independent Professionals like yoga instructors, musicians and chefs.
• Immense opportunities for talented and skilled Indian youth will open up in the UK which is a major global centre for digitally delivered services due to its strong financial and professional services sectors and advanced digital infrastructure.
• India has secured significant commitments on digitally delivered services for Indian service suppliers, specially in professional services such as architecture and engineering, computer related services and telecommunication services.
• The exemption for Indian workers who are temporarily in the UK and their employers from paying social security contributions in the UK for a period of three years under the Double Contribution Convention will lead to significant financial gains for the Indian service providers and enhance their competitiveness in the UK market that would create new job opportunities as well as benefit large number of Indians working in the UK.
• India has ensured that non-tariff barriers are suitably addressed to ensure free flow of goods and services and that they do not create unjustified restrictions to India’s exports.
• The FTA seeks to promote good regulatory practices and enhance transparency that are in sync with India’s own focus on domestic reforms to enhance the ease of doing business.

As two leading democracies and global innovation hubs, India and the UK reaffirm their commitment to strengthening economic cooperation and working together to address global challenges. The India – UK FTA sets a new benchmark for fair, ambitious, and modern trade agreements worldwide.
 
Source: IE,PIB