India & Britain: partners in need

Since the historic referendum on June 23 this year, the world has understood that “Brexit means Brexit”, notwithstanding the November 3 decision by the British High Court, ruling that the British Parliament will need to approve a formal exit from the EU[1]. The decision of the United Kingdom to leave the European Union may have left its European partners in dismay, and the court ruling may have compromised Britain’s bargaining chips both at home and abroad. But it could position India with a stronger hand when talking new trade opportunities with Britain.

This will play out on November 6 when British Prime Minister Theresa May arrives in India for talks on expanding the trade relationship with India. Given the pre-referendum rhetoric of the Leave (EU) campaign–that trade outside the EU is potentially more lucrative to the UK–May will be unlikely to want to return to London without something in the bag, if only to reassure an increasingly confused, if not agitated, British public, waiting to hear some post-Brexit good news. Indian Prime Minister Narendra Modi will do well to take advantage of this shift in negotiating power in India’s favour.

May comes to India as much to seek reassurance as to give it. She will want to know that whatever deal the UK gets from the EU, India will be a good trade friend to the UK. Theoretically, the UK cannot start formal trade negotiations with third countries such as India until it has formally left the EU. So while a trade agreement with India is not imminent, May will seek to obtain informal reassurances on the sort of trade and other links that will be in place between the two countries once the UK leaves the EU. She will no doubt raise the fact that EU-India trade talks have reached an impasse: so, a bilateral agreement with the UK is likely to be a priority for both parties.

There is much to be done to increase India-UK trade. May herself noted in a speech made in April of this year[2], prior to the referendum, “We export more to Ireland than we do to China, almost twice as much to Belgium as we do to India, and nearly three times as much to Sweden as we do to Brazil. It is not realistic to think we could just replace European trade with these new markets.”

Although India runs a trade surplus of 3.63 billion dollars with the UK[3], the UK accounts for only 3% of total merchandise export from India. Bilateral trade with the UK is only 2% of India’s international trade[4]. Ten years ago, three-quarters of total Indian investment in the EU came to the UK. Today it is one half. Clearly, both India and the UK have had different trade and investment priorities.

This can be turned to India’s advantage. Indian exports to the UK ultimately depend on: i) the extent to which the UK economy slows down, and ii) the depreciation of the sterling. With both these factors as yet unknown, Modi is in a position of strength, and can afford to be aggressive about future terms of trade and non-tariff barriers. For instance, he can ask that India be given data-secure status–currently denied by the EU–to allow increased Indian provision of financial services, which is the preponderant revenue generator for the UK and one where many experts are anyway of Indian origin. He can also push for more favourable treatment of skilled Indians, including those who study in the UK, seeking entry into the British jobs market.

These are not easy negotiations, but post-Brexit, Modi can do better to secure not only these bilateral needs, but also effect exactly the kind of deal India wants from the EU, but which has not been forthcoming from the EU-India FTA talks, stalled since 2013.

To take the trade in goods, a major demand of the EU is that India lower its tariff on European automobiles and wines and spirits. This is not in India’s interest as it will result in more imports than exports in industries where India already has an advantage, like autos, or products in which there is a limited market, like wine.

The real issue for India is the EU’s non-tariff barriers, such as sanitary and phyto-sanitary measures, and technical barriers to trade. The EU imposes rigorous labelling requirements and trademark norms which have adversely affected India’s EU exports, like those of Alphonso mangoes. This won’t matter with the UK as it is not a big exporter of wine, and its biggest carmaker, Jaguar-Land Rover, is already an Indian-owned company.

In terms of trade in services, for India to benefit from an FTA with the EU, it will want binding promises from the EU on liberalising trade for the supply of services, especially in labour mobility, or what is known as Modes 1 and 4[5]— the very contention that caused Brexit.

But stark facts show that Britain needs highly skilled professionals to address its own skills gap, which UK graduates alone cannot bridge. There is already talk of the UK adopting a points-based immigration system. This will give skilled Indians a competitive advantage.

Theresa May has pledged to bring down net migration, but in practical terms, it will be difficult to stick to that agenda. The British cabinet is divided over the issue, though much of the public chagrin over immigration is related to low-level jobs.

This gives PM Modi room for tactful manoeuvre–and a double opportunity: to push for ambitious trade terms with the UK and to use that as a platform to push hard with the EU for a more favourable trade deal than the one currently on the table. For the EU will be observing the outcome of India-UK talks closely to judge how keenly India is pushing for better trade links with the UK and under what terms.

May’s visit offers her some advantages too. Sure, the UK comes to India with considerably less clout or the bargaining power of the EU behind it. But it leaves the UK also unfettered by EU trading rules, and therefore, more negotiating leeway. By starting afresh, the UK can determine its own trading standards for goods and services, and perhaps be more open to discussion on a number of issues, including immigration.

Theresa May needs to be seen to secure future trade deals outside the EU to signal much-needed confidence in the UK economy and help steady the sterling, which has fallen 11% against the dollar since the referendum[6].

The UK’s relationship with the EU after Article 50 of the Lisbon Treaty[7] is triggered to formalise an exit is unclear. Negotiating trade deals individually with all members of the EU will take time and some are in no mood to do any favours to Britain. The intra-EU market is bigger than the UK. So while Teresa May can talk excitedly about the wonderful trade opportunities that are now open to Britain in the future, behind the bravado she will be obliged to negotiate from a worse case scenario position: that is, a deal that denies favourable status to the UK in Europe.

All eyes then are on the two prime ministers. For now, no one knows what Brexit really means, not even the British; and countries like India should capitalise on the uncertainty.

May should partner thoughtfully with India on mutual strengths, like financial services and innovation. The UK is a financial services powerhouse, and has a globally recognised innovation and research ecosystem, much of it funded by the EU. This funding is now in doubt. Some research institutions are already suffering, unable to apply for EU funding. May will inaugurate a science and technology summit in India; she can use this opportunity to collaborate with India on innovation, helping to keep the UK ecosystem viable—and affordable. It can perhaps start a partnership with India as enviable as the one that Bengaluru shares with Silicon Valley, and without the onerous overhang of Washington’s negative lobbying on IPR and pharmaceutical issues.

So could it be that May, Prime Minister of the once again Great Britain comes to India more with a begging bowl than a sharing platter, desperate to secure trade deals with big economies. India’s rapidly growing economy and its increasing openness to trade puts PM Modi and India firmly in the driving seat at the negotiating table.

Yasmeen Khwaja is an independent economist specialising in anti-poverty and growth strategies/ policy. She previously worked for the UN Food And Agricultural Organisation, the World Bank and the Overseas Development Institute. She has also carried out consultancies for UNDP and the Bill and Melinda Gates Foundation. In addition she is a member of the teaching faculty at the School of Oriental and African Studies, London.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

References

[1] Judgements, Courts and Tribunals Judiciary, Government of the United Kingdom, R (Miller) -V- Secretary of State for Exiting the European Union, 3 November 2016, <https://www.judiciary.gov.uk/judgments/r-miller-v-secretary-of-state-for-exiting-the-european-union/>

[2] May, Theresa, ‘Home Secretary’s speech on the UK, EU and our place in the world’, speech delivered at Institute of Mechanical Engineers, London, 25 April 2016, <https://www.gov.uk/government/speeches/home-secretarys-speech-on-the-uk-eu-and-our-place-in-the-world>, (Accessed on 4 November, 2016)

[3] High Commission of India, Economic & Commerce Wing, Brief on India-UK Bilateral Economic Relations, (London: High Commission of India, 2016), p. 13, https://www.hcilondon.in/pdf/India-UK-Bilateral-Economic-Brief-as-on-June-6-2016.pdf, (Accessed on 4 November, 2016)

[4] Ibid, p 12

[5] World Trade Organization, General Agreement on Trade in Services Training Module: Chapter 1, Basic Purpose and Concepts, Definition of Services Trade and Modes of Supply, <https://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c1s3p1_e.htm> , (Accessed on 4 November, 2016)

[6] As per institutions calculations. Great Britain Pound had an exchange rate of 1 GBP = 1.4883 USD on 23 June 2016 and as of 3 November 2016 the exchange rate is 1 GBP = 1.1231 USD

[7] Treaty of Lisbon, European Union, Article 50, <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:C2008/115/01&from=EN>, 9 May 2008