The India-UK free trade agreement, arrived at after three years of talks, comes at a time when US President Donald Trump’s tariff shocker has led to a great churn in the global trade order. The concessions made by India to the UK are likely to set the base for its trade talks with the US, the EU and others. Even though the trade volumes involved are small, the terms of this FTA assume importance.
Now that the ink has dried on the agreement, questions are being asked about the failure of our negotiators to secure a balanced deal. Sure, Indian negotiators have secured gains on the services side by way of easier mobility for professionals and exemption of social security contributions but they have been found wanting on the goods side. India might have secured some market access in textiles, footwear, seafood and fruit (where duty cuts are significant), but trade experts believe that the grand-sounding tariff reduction by the UK on 99 per cent of tariff lines covering almost all of India’s exports is not as great as it seems. This is because, according to analysts, of the $13.5 billion goods exports to the UK (in 2024), $7.5 billion comprises items that were zero-rated, anyway (medicines and petroleum). India’s goods trade surplus of $5 billion and an equally large one in services (on exports of $18.4 billion in 2024) is slated to fall over time, according to the UK government’s ‘technical note’ on the deal. But bilateral trade deficits alone cannot tell us whether a deal is working for India or not, as there could be larger positive economic fallouts.
India has agreed to a phased reduction in car import duty from 100 per cent to 10 per cent, with a quota in place. While it is true that the auto sector contributes a third of manufacturing GDP, it is unlikely that high-end British car brands like Rolls Royce, Bentley and Aston Martin will upset the industry too much. In a future trade deal, the auto sector (now mature and confident) and professional services may well be used as bargaining chips to secure access to other sectors or to protect sensitive ones such as dairy. The same holds true for whisky and gin.
Concerns raised
Experts and industry stakeholders have expressed some concerns regarding the FTA, particularly on two key issues – the UK’s carbon tax and the slow progress of the Bilateral Investment Treaty (BIT) between the two countries. According to them, the UK’s Carbon Border Adjustment Mechanism (CBAM), commonly referred to as a carbon tax, could disrupt the balance in the India-UK FTA. The CBAM, set to launch in 2027, will impose a levy on imports from countries that have lower or no carbon pricing, targeting sectors such as aluminium, cement, fertiliser, hydrogen, iron and steel.
Experts warn that the UK’s carbon tax could harm Indian exports, while the influx of duty-free UK goods into India may further disrupt the trade balance. Moreover, the India-UK BIT is still unresolved, raising concerns regarding dispute resolution timelines and taxation provisions. They contend that these issues must be addressed to fully realise the full potential of the FTA.
The New Delhi-based think tank Global Trade Research Initiative (GTRI) says that the FTA lacks provisions to address the UK’s carbon tax, which could undermine the benefits India expects from the agreement. “The CBAM issue has not been addressed in the FTA and there is also no noise from the industry,” says Ajay Srivastava, founder, GTRI.
Experts warn that the UK’s carbon tax could harm Indian exports, while the influx of duty-free UK goods into India may further disrupt the trade balance
GTRI’s estimates suggest that the UK’s plan to introduce a carbon tax on products such as iron and steel, aluminium, fertiliser and cement could impact India’s exports to the UK, potentially amounting to $775 million. Kanishk Maheshwari, co-founder & MD, Primus Partners, believes that India should engage in bilateral consultations with the UK to explore exemptions or compensatory measures regarding the proposed carbon tax. He recommends invoking rebalancing provisions under the FTA and developing a domestic carbon framework aligned with global norms to address the issue and restore balance in trade relations. “The fact that CBAM will not be implemented until January 2027 may have allowed negotiators to finalise the FTA while deferring the resolution of CBAM-related issues to future discussions,” says Maheshwari.
In fact, Indian negotiators should aim to extend the implementation timeline of the UK’s carbon tax by 3-4 years, Maheshwari feels. He emphasises the importance of proactive engagement with the UK to ensure the carbon tax doesn’t undermine the benefits and reciprocity envisioned in the FTA. “Other than this, the government may think of introducing some incentivisation programme to support potentially impacted sectors and neutralise the cost disadvantage,” notes Maheshwari.