India–UK Free Trade Agreement (FTA) Negotiations

General Studies Paper-2

Context: The India–UK Free Trade Agreement (FTA) negotiations have hit fresh hurdles, primarily due to the UK’s proposed Carbon Border Adjustment Mechanism (CBAM) or carbon tax.

Background

• The India–UK FTA negotiations were formally launched in 2022, as part of efforts to deepen economic cooperation and boost bilateral trade.
• As per data from FY 2023–24, the trade volume between the two countries reached $21.34 billion, an increase from $20.36 billion in the previous fiscal year.
• Presently, goods exported from India to the UK face an average import duty of 4.2%.
• The two sides are now aiming to conclude an FTA, a Bilateral Investment Treaty (BIT) and a social security agreement termed as the Double Contribution Convention Agreement (DCAA).

Key Demands of India

• India has been pushing for greater market access for its products, particularly in labour-intensive sectors such as textiles, garments, gems, and jewellery.
• India has called for liberalisation of the UK’s visa regime to allow movement of skilled professionals from Information Technology (IT), IT-enabled services (ITeS), and healthcare sectors.
• India has also demanded special provisions for Micro, Small and Medium Enterprises (MSMEs) and requested flexibility regarding carbon emission standards.

Key Demands of UK

• The United Kingdom is keen on reducing tariffs imposed by India on high-value items such as Scotch whisky, electric vehicles, chocolates, and lamb meat.
• It is also seeking market access in telecom, legal, insurance, financial services.
• The UK is pressing for a sunset clause in the proposed Bilateral Investment Treaty and greater flexibility on issues like data localisation and the recognition of its new carbon tax regulations.

CBAM and India’s Concerns

• The UK’s draft CBAM legislation, effective January 1, 2027, imposes levies on high-emission imports like cement, steel, aluminium, fertilisers, hydrogen.
• The emission calculation will follow the UK’s domestic Emissions Trading Scheme.
• Indian concern: CBAM undermines the principle of Common But Differentiated Responsibilities (CBDR) in climate negotiations.

India’s Response to CBAM

• India has proposed a “Rebalancing Mechanism,” which would require the UK to compensate Indian industries for losses incurred due to the carbon tax.
• India has emphasised that its Carbon Credit Trading Scheme (CCTS), which is based on emission intensity rather than absolute emission levels, is more suitable for a developing economy.

Way Ahead

• To ensure that the FTA benefits are not undermined by non-tariff barriers like CBAM, India must negotiate firmly and strategically.
• India must continue to advocate for the CBDR principle and push for differential treatment in climate-related trade measures.
• Institutional mechanisms like the proposed rebalancing clause and effective dispute resolution frameworks must be built into the final agreement to protect the interests of both the parties.