The UK and India Trade Agreement: Bottom’s up!

Having conceded that a trade deal with the US is unlikely to materialise while Biden remains in the White House, the government has shifted its focus to striking deals with other big economies at speed before the next election. As Trade Minister in the Truss government, Kemi Badenoch, had reportedly been told that her priority was to secure a free trade agreement with India in time for Diwali (24 October), the deadline set by India’s Modi and Truss’ predecessor, Boris Johnson. The deadline has passed without any deal being finalised.

Investors are, however, particularly optimistic about what a trade deal with India could mean for the Scotch whisky industry, which has dominated the negotiations so far. No other nation drinks as much whisky as India but thanks to tariffs of 150% on imported liquor, Scotch whisky currently accounts for just 2% of the market. The impending deal ought to be music to the ears of Scotland’s world-famous industry and is looking especially rosy for beverage company Diageo plc, which owns over 200 drinks brands with sales in over 180 countries, including the world’s bestselling Scotch whisky brand Johnnie Walker. If the rumours are true that the UK is on the cusp of securing a cut to India’s steep tariff on imports, Citigroup has predicted that Scotch sales could rise by as much as US$ 2.9 billion.

But there’s a catch.

India may well be prepared to slash the federal whisky tariff, but Delhi’s negotiators are using it as leverage to get what they want out of the deal. In the latest plot twist, India threatened to apply $247 million of retaliatory tariffs on Scotch and other industries if Britain refuses to abandon controversial safeguards, it put in place to protect its domestic steel industry. This approach is not dissimilar to the one India took with the US – also over steel.

Publicly, the UK’s trade department says it will “only sign when we have a deal that meets the UK’s interests.” Though, privately, insiders are reportedly acknowledging India’s “dirty tactics” to push the UK into a deal that is expected to focus on eliminating goods tariffs.

Meanwhile, the UK’s services sector is having doubts that the trade deal will benefit British firms at all. In August, several business associations, including representatives from the financial services, pharmaceutical, tech and chemical industries, voiced their concerns about the speed of the talks and what could meaningfully be agreed in the time. Though we do make a lot of whisky, the UK remains overwhelmingly a service-based economy and securing strong protections for intellectual property rights and the free flow of data between the two counties were key objectives for the deal set out in the UK’s strategic approach for talks. Yet data looks to be a major roadblock to landing a deal that secures big wins for the UK’s services giants. David Henig, director of UK trade policy at the European Centre for International Political Economy, has concluded that the deal is set to be “predominantly a fairly narrow set of tariff reductions rather than anything significant that will change the cost of doing business in India for UK companies.”

The services sector has made a direct plea to the Indian government via the UK India Business Council to unravel the bureaucratic red tape that is regularly prohibitive for investors looking to set up or expand operations in India. The Council has urged India to take a broader view of priority sector lending norms for foreign banks operating in India and sought equitable tax treatment, while also flagging the increase in counterfeit product sales through e-commerce platforms as a deterrent for intellectual property owners. Even with tariff cuts on Scotch, the whisky industry has warned that a host of bureaucratic barriers will prevent the reduction from being worthwhile. Whether the Indian government takes heed, either as part of or alongside the trade agreement, is currently unclear.

The negotiations are also the source of some tension within the government. The Indian government is pushing for a significant liberalisation of visa routes for workers and students as part of the trade deal. Although some senior cabinet members may be supportive of relaxing immigration rules to help businesses fill vacancies, Badenoch (alongside Home Secretary Suella Braverman) are previously understood to have opposed proposals for a ‘freedom of movement’ agreement. How this plays out over the next few weeks is uncertain but the latest iteration of Conservative government is likely to be tentative about pushing through anything too unpopular with voters.

The Queen’s death has also added an unexpected dimension to the trade negotiations, with the debate about the Koh-i-noor diamond reignited. Shortly after her death was announced, ‘Kohinoor’ started trending on Twitter in India. The diamond, one of 2,800 stones set in the crown made for the Queen Mother which Camilla is set to wear at King Charles’ coronation, is the 105-carat oval-shaped brilliant proverbial jewel in the crown. Believed to be mined in modern-day Andhra Pradesh between the 12th and 14th centuries, the earliest record of its possession puts it in the hands of the Mughals in the 16th century. The East India Company acquired the stone in the late 1840s from 10-year-old Maharajah Dunjeep Singh. The company presented it to Queen Victoria and it was placed in the Queen Mother’s crown in 1937. The Koh-i-noor has been among the British crown jewels ever since, but governments in Iran, Afghanistan, Pakistan, and India have all laid claim to the diamond.

In 2016, the diamond was at the centre of a court battle after an NGO filed a petition asking the court to direct the Indian government to secure its return to India. At the time the solicitor-general, representing India’s government, said the diamond was a gift to the East India Company and it was “neither stolen nor forcibly taken.” However, the government later U-turned and said it would make all possible efforts to return the diamond to India amicably.

It is not publicly known if, or to what extent, the diamond has formed part of the trade negotiations. The strength of feeling among the people of India about the cultural significance of the diamond, combined with the UK’s weakening position in negotiations, have led many historians and political commentators to postulate that it might be India’s final trump card to play.

If you would like to discuss the India trade deal in more detail, please contact our policy specialist Thea Southwell Reeves on theasouthwellreeves@wacomms.co.uk.