Post Brexit World - India's trade relations with the EU and UK

Sujit S Nair FRSA is the RSA Connector in India and the Chair of Europe India Centre for Business and Industry. Here, he explores the challenges and opportunities arising from India's trade relations with the UK and EU in a Post Brexit World.

Past.

On 23^rd June, 2016, UK electorate stunned the world by voting to leave the European Union, following which UK government agreed to leave EU by 30^th March 2019. This created an opening for UK to pursue policies which are independent of European Union. On the flipside, it would restrict the free movement of people, goods and services from UK to EU and vice versa.

Present.

India and UK have had a special relationship over the last few years. However, under the present circumstances, whereby UK might not have unrestricted access to European markets, it is important for the UK to build closer trade relationship with India as it offers an opportunity for UK businesses to not only sell products and services to India's booming middle class, but also could play a major role in tapping business opportunities which is available in the fastest growing economy of the world. UK has been negotiating Free trade agreements (FTA) with India but India government has been reluctant to go ahead with the discussions as it would like to wait till the Brexit terms are finalized between UK and EU.  If FTA is signed between UK and India, UK companies tend to benefit by the removal of tariffs on its high value exports like machinery, metals, pharmaceuticals, whisky amongst others. As for India, the major beneficiary of the FTA will be the apparel and footwear sector as tax and tariffs are impeding the competitiveness of India's apparel and footwear sector when compared to better market access enjoyed by companies from Bangladesh, Vietnam and Ethiopia. Politically, for India, this will also be beneficial as apparel and footwear sector are one of the largest creators of formal and productive jobs.

 India and EU have been in discussion to sign FTA since 2007 but the discussion have not progressed much as they are some major issues that are holding back the signing of the agreement. While the EU is concerned with issues w.r.t India’s intellectual property regime, India’s duty and tariffs in areas of wine, spirits, dairy products and India’s protectionism of its automobile sectors amongst others, India has been concerned with EU’s heavy subsidy to its agro industry, imposition of temporary import restrictions, delay in recognizing India as data secure country and strict visa regime.

Future.

There are about 800 Indian companies operating in UK which employs more than 100,000 people. For Indian companies operating in UK, they are left with no option but to wait and watch on how things w.r.t Brexit take shape before making their next move. Majority of Indian companies use UK as a launch pad for entering into European market and they operate in the European market through their affiliates/ headquarters which are situated in UK. If these companies have major business in EU and if the Brexit terms will restrict free movement of goods, people, services and capital, then majority of these India companies, especially the smaller ones, might move to EU as they would try to avoid the expenses of having separate entities in UK and EU.  In addition to the financial implications, Indian companies in UK usually have majority of their staff based in UK and travel to mainland Europe for business purposes. If Brexit restricts free movement of people, then this model will not work out for Indian companies and they might prefer to move their staff to EU so as to make it easy for them to travel around EU as EU is a large market with a population of 500 million people compared to UK’s population of 65 million.

Outside of trade, another major roadblock in UK India relationship will be the visa issues related to the movement of people as this is a politically sensitive issue both in the UK and India.  The visa issue had recently prompted the India’s Commerce minister to say that the ‘visa issue sounds like non-tariff barriers in services sector’ and that UK is ‘no longer treating India as an old friend’. One of the major reasons why UK wants to leave the EU is to restrict the movement of people from other European Union countries to the country. Therefore, I really do not see a scenario whereby UK would want people from India to have more than the current level of access to the UK job market.  Under the current administration and policies pursued by the UK government, I do not see much of the improvement on the visa issue anytime soon and this might remain a contentious issue in UK India relationship.

Therefore, in my opinion, if it’s a hard brexit, then a large number of Indian firms will shift a major portion of their operations to a country within the European Union so as to avail benefits of free movement of goods, capital, services and people between member states. If the Brexit turns out to be soft, then this approach would leave the UK's relationship with the European Union as close as possible to the existing arrangements and therefore, Indian companies might continue with their current model of using UK as a base to tap opportunities in European markets.