India-UK FTA to benefit high quality labour-intensive goods

India's high quality labour-intensive goods such as apparel, footwear, carpets and cars will benefit from the removal of import duties by the UK, under the proposed free trade agreement between the two countries, according to think tank GTRI.

However, the overall gains for India will be limited because most of the goods from here are already entering the UK at low or zero tariffs (import or customs duties), the Global Trade Research Initiative (GTRI) said.

In 2022-23, India's merchandise exports to the UK were valued at USD 11.41 billion and out of this, USD 6 billion worth of goods such as petroleum products, medicines, diamonds, machine parts, airplanes, and wooden furniture entered Britain at zero levy, it said.

"The FTA is expected to have a limited impact on increasing these exports because over half of Indian products already enter the UK with low or no tariffs. The average duty on goods imported from India into the UK is 4.2 per cent," GTRI Co-Founder Ajay Srivastava said.

However, there will be gains from reducing duties for Indian exports worth USD 5 billion and those items include textiles, apparel (shirts, trousers, women's dresses, bed linen), footwear, carpets, cars, marine products, grapes, and mangoes.

"These products face relatively low to moderate tariffs in the UK," he said.

Citing examples, the think tank said that duties on yarn and fabric are 4 per cent, while tariffs on shirts, trousers, women's dresses, and bed linen range from 10 per cent to 12 per cent.

Similarly, handbags and trunk cases attract 8 per cent tariffs, levies on footwear vary from 4 per cent to 16 per cent.

These products will benefit from the FTA's tariff reductions by the UK.

Chief negotiators of both the countries are negotiating the pact in the national capital and talks are at a crucial stage, as the negotiations are expected to close by end of this month.

GTRI added that while the duty elimination in the UK can help Indian exports, significant growth requires improvements in product quality and signing an FTA alone may not lead to a substantial increase in India's labour-intensive goods exports.

For instance, India's textiles and apparel exports to Japan did not see significant gains from the free trade agreement, Srivastava said.

From 2007-09 to 2019-21, India's exports to Japan grew from USD 257.7 million to USD 368.6 million, a cumulative growth of 43.1 per cent, while India's global exports grew by about 67.9 per cent during the same period.

Therefore, the modest increase in exports to Japan may be attributed to natural growth factors rather than the FTA, he added.

Further, UK exporters would gain immediately after India eliminates high tariffs on most British products, it said.

India's merchandise imports from the UK were USD 8.96 billion in 2022-23. Out of this, it said, 91 per cent of total merchandise imports from the UK enter India on payment of average to high tariffs duties.

For example, the tariff on cars is 100 per cent and on Scotch whisky and wines are 150 per cent.

The simple average tariff in India on goods imported from the UK is 14.6 per cent, it added.

According to GTRI, British products which will gain from the FTA (free trade agreement)-led tariff reductions include precious metals (silver, unwrought platinum and gold, diamonds); metal scrap (aluminium, copper waste); petroleum products; scotch and other alcohol; machinery (turbojet, taps, valves); medicine; and make up items.

The UK exported $ 2.7 billion worth of precious metals; and USD 374 million worth of Scotch and other alcohol into India during 2022-23.

On automobiles, it said: "for luxury cars like those from JLR, Bentley, Rolls-Royce, and Aston Martin, the UK might want zero tariffs, but India could reduce them from 100 per cent to 50 per cent. India might also consider allowing a few thousand units at a 25 per cent tariff".

It added that India could reduce tariffs from 150 per cent to 50 per cent over a few years, similar to what it did for Australian wines.

These sectors in India have had high tariff protection, even more than agricultural products. Significant tariff cuts, especially for wines, will help the Indian market grow.

On Rules of Origin, an important issue in the agreement, GTRI said India tends to prefer more conservative rules compared to most developed countries, leading to extended discussions and negotiations in its FTA talks, including with the UK.

"However, India may need to be more flexible in its Rules of Origin framework, especially as its firms in sectors like chemicals, electronics, and synthetic textiles are increasingly using imported inputs," it said.

Rules of Origin ensure that products from third countries do not receive FTA benefits unless they undergo significant transformation in the exporting country.