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Pros and Cons: Bilateral Trade Agreement between Post Brexit UK and India

by
May 5th, 2017

As the UK prepares for the post Brexit era, it is eyeing India as one of the alternative partners for future trades and investments. India offers long-term prospects and reinforcing the trade relationship now, while the market is fertile, would enable the UK to optimise the benefits of India’s wave of future economic development. Despite India’s alluring investment prospects, there are many risks and the question is how the opportunities weigh up against the risks?

Business risks in India

One of the key drawbacks in doing business in India is the country’s less sophisticated business infrastructure, which increases the risks of doing business:

Ease of Doing Business Rankings India vs Germany and France 2016

Source: Euromonitor International from World Bank

Note: Countries are ranked on the basis of 1-189 with number 1 being rated at the top/best performing country, while 189 at the bottom/worst performing country.

  • While India ranks near the bottom for many indicators in the World Bank’s Ease of Doing Business, Enforcing Contracts is one of India’s worse performing sub-indicators with a ranking of 178 out of 189 countries in 2016;
  • India is one of the worst performers in the Economic Freedom Indices with a ranking of 123 out of 176 countries in 2016 indicating more than usual government interventions and a higher regulatory burden, contributing to the challenges of the business environment;
  • India’s rank in the Corruption Perception Index is not very encouraging being placed in the 79th position out of 176 countries surveyed in 2016. The Indian government has undertaken a number of anti-corruption initiatives including requiring corruption scandals to be resolved within two years. Despite these initiatives, corruption continues to be a major problem for the country;
  • India ranked 90th out of 202 countries in Government Effectiveness and Rule of Law Indices and 123 out of 202 countries in Regulatory Quality Index in 2015. Although these rankings fare better than some other developing countries, India is lagging behind developed countries;
  • India is aiming to stipulate new terms and conditions for all its bilateral deals, which will add to the risks and costs of doing business in India. Foreign investors will not be able to enjoy the protection of the international law and will have to pursue local remedies for five years before seeking international arbitration.

Economic opportunities in India

Given the challenges, a key question is how opportunities weigh up against risks in India. The three areas in which India and the UK business relations can develop are:

Foreign Direct Investment –

  • As one of the fastest growing economies with a GDP growth projection of 42.9% (period growth at constant prices) between 2016 and 2021, there are ample investment opportunities in India;
  • Capital investment in telecommunications in the UK equalled US$6.2 bn (constant prices) in 2016 compared to US$9.5 bn (constant prices) in Germany and US$8.8 bn (constant prices) in France during the same period, indicating that there are scopes for more investment in the UK’s telecommunication sector. Globally, India ranked number 3 in 2016 in terms of investment in telecommunications at US$13.1 bn (constant prices), making India one of the best suitors to invest in the UK’s telecommunication sector.

Goods –

  • In the absence of the EU-India free trade agreement, the UK expects to benefit from tariff free trade with India (given that the UK will be free to negotiate its own bilateral deals following Brexit).;
  • EU exports to India in 2016 equalled US$40.3bn and the UK expects to gain a share of this trading relationship given that the UK products would be more competitive under more favourable trading terms and conditions;
  • Amongst the manufacturers that expect to benefit significantly from a free trade agreement between the UK and India are whiskey brands which have one of the highest tariffs in India at 150%.

Services –

  • Even though both the UK and India have significant service sectors, trading of services between these countries have been minuscule;
  • The service sector (Financial Intermediation, Real Estate, Renting and Business Activities) in the UK accounted for 34.4% (constant price) of total the GVA in 2016, while in India the sector accounted for 21.2% (constant price) during the same period;
  • According to trades sources, the EU accounts for 60% of the UK’s import of commercial services (engineering, insurance, information services), but part of this can be potentially replaced by India at more competitive rates.

Balancing the risks and opportunities

On the whole, India presents good long-term prospects but does not form a strong alternative to the EU single market:

  • The significant challenges associated with India’s business environment can outweigh the investment prospects and this means that it would be risky to bank on India as an alternative to the EU single market;
  • India’s new terms and conditions regarding the arbitration process making it harder for foreign investors to access international courts will add significantly to business risks. Hence such terms and conditions need to be considered very carefully by the UK government. A hard Brexit may leave less flexibility for the UK to negotiate with India;
  • In considering bilateral trading relationship with the UK, India is considering its own agenda including a preferential treatment when it comes to sending Indian students and professionals to the UK, which will make it harder for the UK government to keep immigration down;
  • Some of India’s sectors including insurance, in which the UK is very strong, are not completely open to foreign investors. In 2015, the Indian government increased the limit of foreign ownership from 26% to 49%, but it still is an onerous process;
  • EU is a larger market providing the UK exporters with the opportunity to benefit from a higher margin. GDP per capita in the EU equalled US$32,382 (constant price) compared to US$1,749 in India (constant price) in 2016, which indicates that the EU consumers have a much higher affordability. Despite the strong projected growth in India, GDP per capita in India will still be lower than the EU at US$3,752 (constant price) compared US$39,287 (constant price) in 2030.

For more on Brexit, please refer to our strategy briefing The UK Post Article 50: The Impact of a No-Deal Brexit

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Oru Mohiuddin

Oru Mohiuddin is a Strategy Analyst for Euromonitor International. She has a Master in International Development from University of Birmingham and has been working in the company since 2007. Professional interests include tracking beauty trends with a particular focus on colour cosmetics, hair care and evaluating company performance.