British High Commission officials, DGFT representatives, Chief Ministers, Ministers of States, and various industry associations were involved in these events. The commencement of the agreement was celebrated as a ‘historic milestone and a testament to the strengthened India-UK bilateral relationship’. Notably, Bengaluru received India’s first tariff-free import of Scottish Salmon, valued at US$800, which previously faced a 33% tariff (though a more significant item would have been preferable!).
The true benefits of modern trade agreements extend beyond tariff reductions. As noted, the UK stands as India’s sixth largest investor, contributing approximately 5% of cumulative FDI equity inflows into India since April 2000. The CETA is expected to significantly enhance future investments due to its terms. The Double Contribution Convention (DCC) offers a notable advantage for Indian professionals in the UK, exempting them from UK social security contributions for up to 5 years. With expectations of doubling trade, there is considerable optimism surrounding this ‘new generation’ trade agreement.
While celebrating the trade agreement, it is vital to take a measured perspective. Trade experts Jayant Dasgupta and Abhijit Das have referenced a report from Britain’s Department of International Trade that estimates by 2040, the CETA could lead to a cumulative increase of ₹12.55 lakh crore in India’s bilateral export of goods and services. This translates into a modest annual increase. In contrast, British exports are projected to reach ₹20.1 lakh crore due to the significant disparity between India’s and Britain’s tariff structures; nearly 53% of imports into Britain, including those from India, already enjoy duty-free access. As a result, India tends to concede more in each FTA than it gains.
Consequently, each free trade agreement (FTA) has led to an increase in the trade deficit. Imports soar as trade partners gain a substantial advantage, placing Indian exporters under a stricter regulatory framework. Historically, Indian exporters have been hesitant to fully utilize the FTA route, believing that compliance costs outweigh the benefits. Additionally, the increase in imports through FTAs adversely affects GST revenue. Given that IGST revenue from imports constitutes a significant portion of overall GST revenue, a rise in duty-free FTA imports translates to diminished GST income.
Another unintended consequence associated with all FTAs, including the India-UK agreement, parallels a prevalent issue in GST—an inverted duty structure. While GST has led to the accumulation of credit, FTAs impose low or zero duties on final products while higher duties are levied on inputs needed for manufacturing. This contradicts the ‘Make in India’ initiative. Ajay Srivastava, another trade expert, wisely notes that this situation incentivizes Indian manufacturers to relocate production to other countries and then export finished products back to India, which would be an unfortunate outcome.
The India-UK CEPA encompasses a wide range of activities, compelling domestic laws to align with the agreement’s requirements. Areas such as environment, labor, intellectual property rights, gender-related policies, digital trade, and government procurement may necessitate legal adjustments. Dasgupta and Das suggest that by agreeing to have domestic laws subjected to joint monitoring and scrutiny, India risks ceding sovereignty with minimal evident benefits. They also point out that the CETA restricts India’s ability to pre-access source code for regulating AI, while requiring the government to make more data public. While these changes may not inherently be negative, they do open up competition.
Therefore, it is imperative that we prepare our domestic industry accordingly. The opening of government procurement under the India-UK CETA is particularly crucial. The agreement grants UK firms legally guaranteed access to participate in government projects. UK firms can now qualify as ‘Class II Local suppliers’ with a minimum local (UK) content of 20%, which may increase up to 49%. This concession is remarkable—only Japan has previously received similar treatment.
CETA benefits must be closely monitored. If course corrections are necessary, we should not hesitate to negotiate and implement them. Domestic ecosystems need to be bolstered. We must continually assess our import duty structure—the MFN rates should be lowered to diminish, if not eliminate, the tariff advantages provided by FTAs.
The final point comes from Chief Economic Adviser Anantha Nageswaran, who emphasizes the merits of competition. He argues that protectionism does not cultivate strong industries; it only sustains weak ones. He further asserts that an industry that never encounters superior products will never strive to improve. This poses a risk that domestic producers may cease manufacturing, opting instead to serve as traders using the FTA route.
—The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs (CBIC). The views are personal.
