With Sunak at helm, economic ties may deepen

Sushma Ramachandran

Senior Financial Journalist

THE political turmoil in the UK that has now led to the advent of Rishi Sunak as Prime Minister has come at a time when economic ties with India had been poised to make a great leap forward. The most significant of these was the proposed free trade agreement (FTA) between the two countries that has been on the cards since January this year. This is a pact that had been looked forward to with enthusiasm on both sides. Despite the change of guard at the helm earlier, with Boris Johnson being replaced last month as Prime Minister by Liz Truss, the talks on the FTA had continued without a break. There were even suggestions of an announcement of an early harvest deal by Diwali.

But the UK is now preoccupied with the economic crisis arising out of the disastrous financial policies of the Truss government. Whether Sunak will have the time to pay attention to this element of India-UK ties is doubtful, even though he has talked about the need to make the relationship between the two countries a more two-way one. As a consequence, the proposed FTA has probably gone into cold storage till at least 2023.

But the prospects for concluding it in a hurry had dimmed even before the departure of Truss as PM. The climate for congenial talks became frosty as soon as former Home Secretary Suella Braverman expressed her reservations about the trade deal. This was specifically so since it could make immigration easier for Indians, who were known for overstaying their visas. These remarks had vitiated the atmosphere but there was still a determination on both sides to move ahead right till the political scenario changed dramatically last week in the UK.

The question is: What were the reasons for India and the UK to have been so keen on finalising this trade deal and making an announcement as soon as possible?

On the British side, the need for entering into a bilateral pact with a major economy had become an imperative after Brexit meant that it had burnt its bridges with Europe. At the time, it was envisaged that the first country to be a willing trade partner would be its old and trusted ally, the US. On the contrary, that country made it clear that it would not be interested in negotiating an FTA for the time being. This was conceded last month by Truss when she stressed that the focus would be on joining the 11-member Trans-Pacific Partnership as well as bilateral trade pacts with states in the Gulf region and India.

Entering into a trade deal with India would be advantageous to the UK for several reasons. One is that it has now become the world’s fifth largest economy, matching the UK in size. It thus gives access to a huge market for the British industry. Second, there have been hopes that the heavy tariffs on products like whisky and spirits will be reduced, enhancing the market for these quintessentially English products.

It was also felt that, in return, some of the demands for easier visas for professional skilled workers could be acceded to as this would not be in the nature of immigration but more about business mobility. Till Brexit, the demand for skilled workers had been met largely through an influx from the neighbouring European countries, where visa curbs were not an issue. Some of the demand for professional workers could thus be met from India. Though, it is precisely in this area that Braverman's remarks on immigration issues have created roadblocks.

India has been equally anxious to conclude the FTA, given the need to provide support to exporters in terms of lower tariffs in key markets. It has stayed away from the large multilateral grouping, the Regional Comprehensive Economic Partnership (RCEP), in a bid to avoid cheap imports from China entering via third countries. In the process, it has lost out on preferential tariffs available to the member countries. To overcome this handicap, efforts are being made to stitch up bilateral trade deals and the one with the UK has been viewed as having the most potential.

The disappointment over the stalled India-UK trade pact is bound to be palpable given the fact that it was seen as a prestige deal for both sides. Besides, there is no getting away from the fact that the two countries have a special relationship dating back to the colonial era. Though there is resentment over the fact that the UK left India in a state of abject poverty at the time of Independence, the relationship has matured over the years to one of equals. One of the reasons is the hugely influential role of the Indian diaspora in that country, evident in the landmark development of an Indian-origin person becoming Prime Minister.

In addition, the depth of the economic relationship between the two countries is evident from the fact that India is currently the second largest foreign investor in the UK. As many as 850 Indian companies operate there while 600 British companies are located here. The UK is the sixth largest inward investor in India.

The future of the India-UK economic relationship now depends largely on the direction sought to be taken by the new Prime Minister. While he is clearly keen on deepening the ties, he is bound to be constrained by such elements in his party as Braverman who consider easing visa issues to be tantamount to promoting immigration.

Whether he is able to emphasise the economic benefits to the UK by cutting tariffs and easing visa curbs will have to be seen in the coming months.

For India, one of the big lessons from this imbroglio is that it needs to speed up its efforts to finalise more regional and bilateral trade deals. But there is no doubt that this country will pin its hopes on the new UK Prime Minister giving a high priority to deepening the bilateral economic relationship. Whether these hopes will be fulfilled will depend on Rishi Sunak’s perception of the extent to which this could improve the state of the faltering British economy.

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