India-UK Free Trade Agreement

Introduction 

• On May 6, 2025, India and the United Kingdom, the world’s fifth and sixth largest economies, took a significant step forward in their economic relationship by signing the long-awaited Free Trade Agreement (FTA). 
• This deal, hailed by Prime Minister Narendra Modi as an “ambitious and mutually beneficial” agreement, marks a historic milestone in India’s post-Brexit trade diplomacy and is set to deepen bilateral trade and unlock a host of opportunities for job creation, investment, and innovation.

Evolution of the India-UK Free Trade Agreement

• The Initial Political Will:  The FTA discussions between India and the UK began in earnest during British Prime Minister Boris Johnson’s visit to India in April 2022. During this visit, both sides set an ambitious target for a “Diwali 2022” deadline, aiming for a swift agreement. However, the negotiations faced delays due to various complexities, both domestic and international. Despite these setbacks, the strong political will from both countries laid the foundation for what would eventually become a landmark deal in 2025.

• Post-Brexit Dynamics: The UK’s exit from the European Union in January 2020 marked a major turning point for the country’s trade policy. The Brexit transition necessitated the UK to seek new trade partners, and India, with its growing economy and strategic importance, presented an attractive opportunity. The FTA between the two nations represents not just an economic partnership but also a strategic alignment as the UK looked to expand its trade horizons beyond Europe. India’s dynamic market offered immense potential for both countries, making the agreement crucial for enhancing trade and cooperation.

• Bipartisan Support Across UK Governments: One of the most remarkable aspects of the India-UK FTA is the bipartisan support it has garnered across UK administrations. From Boris Johnson’s leadership to Rishi Sunak and Keir Starmer’s positions, the deal maintained continuity across political transitions, indicating a rare consensus on the importance of strengthening bilateral ties with India. This stability in political backing was key in ensuring the successful negotiation and eventual signing of the agreement.

• India’s Global Trade Engagements: The India-UK FTA aligns with India’s broader strategy to enhance its global trade presence. India has already signed trade agreements with several other countries, including the UAE, Australia, and Mauritius. These agreements reflect India’s vision of becoming a vibrant trade and commerce hub, further reinforcing its position in the global economy. The India-UK deal, therefore, is not just an isolated event but part of a larger strategy to increase India’s trade footprint and strengthen its ties with key international markets.

• The China-Plus-One Strategy: As global companies and economies increasingly pivot away from China, India’s strategic attractiveness has surged. The China-Plus-One strategy, which involves diversifying supply chains to reduce dependency on China, has propelled India into the spotlight as an alternative business hub. This growing trend has significantly boosted India’s attractiveness as a trading partner, making the India-UK FTA even more timely and relevant for both economies looking to mitigate risks in global supply chains.

Key Features of the India-UK Free Trade Agreement

• Tariff Reductions on Key Goods: One of the most significant provisions of the FTA is the reduction in tariffs on key goods. India has agreed to halve tariffs on Scotch whisky and gin, reducing them from 150% to 75%, with a plan to bring them down to 40% by the tenth year. Similarly, tariffs on British automobiles will be lowered dramatically from over 100% to just 10% under a quota system. This move is expected to boost UK exports and benefit Indian consumers by lowering the cost of British luxury goods.

• Broader Access to Goods: The FTA ensures broader access to a wide range of goods. Lower tariffs will apply to products such as cosmetics, aerospace parts, medical devices, lamb, salmon, chocolate, soft drinks, and electrical machinery. These provisions are set to enhance the diversity of goods available in the Indian market while also providing UK businesses with easier access to the growing Indian market.

• Liberalisation of Services: A major aspect of the FTA is the liberalisation of services, especially in sectors where both countries have strong competitive advantages. The agreement introduces 100 new annual visas for Indian professionals in sectors such as IT, healthcare, and engineering. Additionally, it provides for mutual recognition of professional qualifications, making it easier for Indian professionals to work in the UK. This provision not only strengthens trade in services but also enhances mobility and cross-border professional engagement.

• Enhanced Customs Cooperation and Regulatory Alignment: The deal includes provisions to streamline customs procedures and reduce non-tariff barriers, fostering smoother access to markets for businesses on both sides. The alignment of regulatory standards will help improve the flow of goods between India and the UK, reducing delays and enhancing market efficiency.

• Carbon Border Adjustments: The UK’s carbon tax policies, which could affect India’s metal exports, were a subject of delicate negotiations. The agreement includes provisions to protect Indian metal exports from undue penalties under the UK’s carbon levy plan. This ensures that developing countries’ concerns are considered and that trade in sectors like steel and aluminum remains competitive.

• Investment Facilitation and MSME Support: The FTA includes special provisions to encourage investment in MSMEs (Micro, Small, and Medium Enterprises). This support includes reduced compliance costs and improved market access, particularly for green and digital sectors. This will enhance cross-border investment and foster innovation, which is essential for both nations’ economic growth.

• Intellectual Property and Digital Trade Protection: A crucial aspect of the agreement is the protection of intellectual property rights (IPR) and facilitation of digital trade. This ensures that India’s thriving IT and pharmaceutical sectors benefit from stronger protections for intellectual property and enhanced data flow between the two countries.

Strategic Implications for Both India and the United Kingdom

• Post-Brexit Pivot: This FTA represents the UK’s largest trade deal since Brexit, signaling a clear pivot towards Indo-Pacific markets. It reflects the UK’s desire to diversify its trade relationships in the post-EU era, with India emerging as a key partner in its global economic strategy.

• Geopolitical Signaling: The agreement also serves as a geopolitical signal to the world. It is a subtle response to America First trade policies and growing trade stagnation with China. By enhancing trade with India, the UK is positioning itself as a key player in the global trade diversification effort, helping reduce over-dependence on traditional trade partners like the US and the EU.

• Boost to India’s Domestic Industries: Indian industries such as pharmaceuticals, textiles, IT services, and auto components stand to gain significantly from enhanced market access to the UK. The agreement will open new export opportunities, boost production capabilities, and create jobs, further strengthening India’s position in the global supply chain.

• Economic Relief for the UK: Amid its ongoing cost-of-living crisis, the UK stands to benefit from more affordable imports under this deal. The reduced tariffs on products such as cosmetics, medical devices, and automobiles will offer UK consumers access to cheaper goods, improving domestic market competitiveness and offering some relief to the economy.

• Strengthening Soft Power and Diaspora Diplomacy: The FTA’s provision for increased mobility quotas and mutual recognition of professional qualifications will enhance India’s soft power globally. The improved ability for Indian professionals to work in the UK will strengthen diaspora diplomacy and deepen people-to-people ties between the two nations.

• A Model for Future FTAs: This FTA can serve as a model for future trade negotiations for India, particularly with the US and the EU. The provisions related to services, regulatory alignment, and IPR protection may provide useful templates for upcoming trade agreements, creating a more streamlined and efficient trade environment.

• Reinforcing Global Trade Stability: In the face of rising protectionism and volatile multilateralism, the India-UK FTA provides much-needed stability in global trade. It reassures investors and trade partners that the global economic system can still accommodate beneficial trade agreements despite the challenges of the 21st century.

India’s Key Initiatives, Collaborations, and Global Trade Programs

• Production Linked Incentive (PLI) Schemes: The Production Linked Incentive (PLI) schemes are one of India’s key strategies to boost domestic manufacturing and exports. The PLI initiative incentivizes manufacturers in various sectors such as electronics, automobiles, and textiles to increase production and improve competitiveness. The scheme aims to reduce India’s dependency on imports, create jobs, and elevate the country’s status as a global manufacturing hub.

• One District One Product (ODOP): One District One Product (ODOP) is a program aimed at promoting local products and giving them access to global markets. By focusing on one product per district, India aims to showcase and export the unique products of each region, which will help in expanding market reach and fostering entrepreneurship. This initiative also plays a vital role in preserving local industries and promoting rural economic growth.

• India-UK Joint Economic and Trade Committee (JETCO): The India-UK Joint Economic and Trade Committee (JETCO) serves as a mechanism for the periodic review of the Free Trade Agreement (FTA) between India and the UK. JETCO facilitates coordinated action and ensures that both parties stay aligned on trade issues, promoting continuous improvements in trade relations. This initiative plays a crucial role in maintaining a dynamic and mutually beneficial economic relationship between the two nations.

• India-UAE Comprehensive Economic Partnership Agreement (CEPA): Signed in 2022, the India-UAE Comprehensive Economic Partnership Agreement (CEPA) marks India’s first major trade deal post-2010. The agreement provides duty-free access to 90% of Indian exports, paving the way for stronger economic ties between India and the UAE. This trade pact focuses on areas such as textiles, pharmaceuticals, food products, and automobiles, offering significant trade and investment opportunities.

• India-Australia Economic Cooperation and Trade Agreement (ECTA): The India-Australia Economic Cooperation and Trade Agreement (ECTA), signed in 2022, aims to improve trade in areas such as education, pharmaceuticals, and agriculture. This agreement enhances market access for India’s service providers, particularly in sectors like education and healthcare, while providing Australian businesses with better access to India’s growing consumer market.

• Digital India and Startup India Missions: The Digital India and Startup India initiatives are central to India’s efforts to empower sectors that benefit from Free Trade Agreements (FTAs). These programs promote digital literacy, innovation, and the growth of startups across India. As FTAs often emphasize services and technology, India’s digital transformation through initiatives like Digital India ensures its growing tech and innovation sectors remain competitive in the global market.

• Supply Chain Resilience Initiative (SCRI): The Supply Chain Resilience Initiative (SCRI), launched in collaboration with Japan and Australia, seeks to reduce dependence on China and strengthen supply chain networks across the Indo-Pacific region. The SCRI aims to create more resilient and diversified supply chains that minimize disruptions caused by geopolitical tensions and global trade uncertainties.

• India’s G20 Presidency (2023): India’s G20 Presidency in 2023 provided an opportunity for India to advocate for “reformed multilateralism” and “inclusive globalization.” India pushed for a more balanced global economic system, where developing nations are better integrated into global trade. This diplomatic leadership highlights India’s growing influence in shaping the future of international trade and global governance.

Challenges in the India-UK Free Trade Agreement

• Immigration Politics in the UK: The legacy of Brexit continues to impact immigration policies in the UK, limiting the number of visas granted to Indian professionals. Although the UK has agreed to grant around 100 new visas annually for Indian professionals, this is far fewer than India had originally sought. This limitation could restrict the flow of skilled workers from India, particularly in sectors like IT and healthcare.

• Regulatory Compliance Costs for Indian MSMEs: Indian MSMEs may face significant challenges in meeting the high technical and environmental standards required by the UK. Without mutual recognition agreements (MRAs), Indian exporters may encounter increased compliance costs, potentially hindering their ability to benefit fully from the FTA.

• Domestic Industry Resistance: Certain sectors within India, such as automobiles and dairy, have expressed concerns about the relaxation of tariffs. These industries worry that reduced tariffs on imported goods could lead to increased competition, making it harder for domestic manufacturers to compete.

• Asymmetric Gains: A report by the Global Trade Research Institute (GTRI) suggests that many of India’s exports already benefit from zero or low tariffs in the UK. As a result, the actual boost to trade might be modest, with some industries seeing only marginal improvements. This could limit the expected benefits of the FTA for India.

• Carbon Taxation Conflicts: The UK’s carbon border tax could pose challenges for India’s metal exports, especially in sectors like steel and aluminum. Similar concerns exist with other trade agreements, such as the India-EU FTA, where carbon taxation could unfairly disadvantage developing countries like India. Negotiations are ongoing to address these concerns.

• Non-Tariff Barriers: While tariffs may be reduced, non-tariff barriers such as stringent UK and EU regulations on food safety, environmental standards, and intellectual property (IP) could still restrict Indian exports. Issues like labelling requirements, phytosanitary measures, and IP protection remain significant hurdles for Indian exporters.

• Limited Stakeholder Consultations: Criticism has been leveled against the lack of transparency and public scrutiny in the FTA negotiations. Many stakeholders, including Indian industry groups, have expressed concerns about the limited consultation processes, which may not fully reflect the interests of all affected parties.

• Data Localization and Privacy Concerns: The UK and EU have strict data protection frameworks, emphasizing data localization and privacy concerns. These requirements may conflict with India’s Digital Personal Data Protection Act, which is still in the process of being drafted. These regulatory differences could create challenges for data flow between the two nations.

Way Forward 

• Diversify the Trade Portfolio: India should broaden its trade relations by focusing on other major trade agreements, such as the India-EU and India-US FTAs. These partnerships hold immense potential for trade growth, especially in services, technology, and manufacturing. Furthermore, engaging in expanded Mutual Recognition Agreements (MRAs) and Sanitary and Phytosanitary Standards (SPS) dialogues will be essential in sectors such as pharmaceuticals, electronics, and agro-products. These agreements would help facilitate easier market access and greater compliance with international trade standards.

• Skill Development for Global Competency: India must invest in sector-specific skill development programs to ensure its professionals remain competitive in global markets. Initiatives like Skill India must be enhanced to equip Indian workers with the global competencies needed to meet international demands. Moreover, negotiating sector-specific visa quotas—such as for digital nurses, fintech workers, and IT professionals—would provide greater mobility for Indian professionals. These quotas would ensure that India remains a key player in critical global sectors while simultaneously benefiting from increased access to employment opportunities abroad.

• Treat the FTA as a Launchpad for Deeper Integration: While the India-UK FTA is a crucial step, it should be considered as a launchpad for further integration rather than the final achievement. India must look at this deal as a starting point to deepen cooperation with the UK and explore opportunities in new sectors. Areas like defence collaboration, education, and climate action hold great promise for mutual benefits. A dedicated committee or body, such as one led by NITI Aayog, should oversee the implementation of the FTA and regularly evaluate its sectoral impact, ensuring it stays relevant and robust in the long term.

• Streamline Compliance Support for MSMEs: India’s Micro, Small, and Medium Enterprises (MSMEs) will face significant challenges in meeting the high regulatory standards set by the UK and the EU. To help these businesses, India must provide technical and legal aid to ensure that MSMEs can easily navigate the complex compliance landscape. This support could include advisory services, training programs, and financial assistance to help businesses meet environmental, technical, and safety standards required by these markets.

• Green Trade Diplomacy:  As global trade becomes increasingly intertwined with climate action, India must develop a comprehensive green trade diplomacy strategy. This includes preparing to navigate the Carbon Border Adjustment Mechanism (CBAM) imposed by the EU and UK. India must engage in diplomatic negotiations to ensure that its industries—especially those in steel, aluminum, and manufacturing—are not unduly penalized under these climate-linked trade regulations. A focus on green technology and clean energy investments will not only help India meet these requirements but also position it as a leader in the global sustainable trade arena.

• Strengthen Data Protection and Digital Readiness: In the digital age, the ability to safeguard data and ensure compliance with privacy regulations is crucial for global trade. India must focus on enhancing frameworks like the Digital Personal Data Protection Act 2023 to align with global standards. Strengthening these regulations will ensure that India remains competitive in digital trade while also addressing concerns around data localization and privacy. Additionally, improving cross-border data flow will enable Indian businesses to better integrate into the global digital economy.