May's Passage to India: Mind the Fence

With 7% annual growth and a pro-business BJP government, India is a fertile prospect for post-Brexit Britain’s trade endeavours. But to avoid rebuff, UK needs to start modestly, tap into India’s development goals, and cultivate natural partnerships in ICT, automotive and health.


  • India’s US$ 225 billion ICT industry wants better access to UK

  • Lowering India’s 150% tariff on whisky would send Scotch exports rocketing

  • Australia’s five-year India trade talks suffer politics-driven setbacks

It’s commercially astute for Theresa May to make India her first port of call on UK’s new global quest for Free Trade. India’s 7% growth this year will outstrip China’s, and India’s rising middle classes are chipping away at traditional protectionism and high tariff rates. Most important of all, in information and communication technology (ICT) India finally has a world-class industry, shortly to be worth US$ 225 billion, whose global prospects the government wants to champion.

But Australia’s attempts to negotiate a bilateral free trade agreement (FTA) with India since 2011 should encourage UK to proceed with caution. Our experience shows that trade talks are easily derailed by politics. And while UK won’t be looking to enter India’s agricultural markets, India continues to protect a wide swathe of service industries, including finance, insurance and accounting.

And there are treacherous, cultural reefs to navigate. Having lost its European role, Britain has found Free Trade — but modern India awoke to the call for protection. Even today, politicians, the media and civil society organisations are quick to play the ‘exploitation’ card with foreign-owned enterprises. To succeed, Mrs May will have to tread softly, befriend India’s influential special interests groups and settle for incremental steps of sector liberalisation.

Liquid gold

By far the strongest card in May’s hand is that UK does not have an offensive agricultural interest in any FTA with India. This puts UK in a far easier bargaining position than other FTA aspirants, specifically Australia, Canada and New Zealand. Protecting the agricultural livelihoods of over 50% of its population[1] has, in the past, impelled India to bring multilateral trade negotiations to a jarring halt. India’s applied tariff rates on agricultural goods currently average over 33%[2], and it’s UK's good fortune to have no interest in negotiating them down.

The most-valuable-plus-attainable opportunity for UK is in whisky. India is home to the biggest whisky market in the world, worth a massive US$10 billion per year. At 1.5 billion litres, consumption of whisky in India is triple the next biggest market — the United States (462 million litres). To protect home producers, India slaps a 150% tariff on imports, which, incidentally is far higher than the 90–100% rates imposed by Pakistan and members of the Gulf Cooperation Council.

Currently, UK exports just £43 million of whisky to India each year, while exports to the US are worth £357 million. Given that the US market is, nominally, one-third the size, the commercial opportunity for Scotland is therefore vast. Admittedly, Indian whisky is distinctive beverage: typically distilled from cane or molasses, it sells for a fraction the price of Scotch or Bourbon. But the commercial opportunity isn’t retired army officers, it’s successful young executives in Bangalore, Mumbai and Delhi who are out to impress. Their numbers are growing. Fast.

Getting preferential access won’t be easy. The tempers of India’s domestic producers will have to be sweetened — though it helps that UK’s Diageo already owns India’s top selling brand, via its USL shareholding. If UK’s Brexit turns out firm-to-hard, UK should gain the freedom to relax EU labelling laws, which currently require Indian whisky to be sold as rum in the UK.

But UK cannot be too cautious. India has already proved trigger-happy with its new labelling laws, and used them to disrupt Scotch imports. And negotiators will need to master Indian states’ highly opaque liquor-taxation laws. Prising open the Indian whisky market would be hugely lucrative and politically intoxicating for British conservatives north of the border. But UK should be certain that the concessions it extracts will genuinely enable Diageo and its ilk to price Scotch into a viable market.

The Passage from India

So much for UK, what’s at the top of India’s FTA bucket list? Almost certainly, it’s visas for skilled migrants. Like Australia, India has suffered from UK’s need to lower net migration by tightening restrictions on non-EU citizens. On the eve of May’s visit, the UK announced a tightening of these restrictions, increasing salary thresholds on intra-company transfer visas by 50% to £30,000. Indian workers account for approximately 90% of visas issued under this scheme, so the terms of such visas will be inextricably bound to the terms of a trade agreement.

The industry principally affected is ICT, plus semi-related business-process management (BPM) outsourcing services. According to the Economic Times of India, the UK is the second-largest market for Indian ICT companies, accounting for 18% of export revenue, or approximately US $19 billion per year. Thus, facilitating ICT exports is India’s number one concern in trade talks with UK — and that includes the ability to place ICT professionals in UK.

It’s at this intersection of trade in services that identifying interests becomes complex. For example, a software house in Bangalore wanting to bundle a business intelligence tool into a third-party, UK app wants protection for its intellectual property (IP). An East London developer might outsource coding to Bangalore, then want to bring the developer to London to expedite test and development. Or big Indian ICT companies, like Tata Consulting or Wipro, may simply want to exchange employees between UK and India for their own professional development.

But however you splice the trade, the basic commercial interests for Indian companies are the free flow of technical expertise and the protection of IP. And without doubt, the biggest impediment to the free flow of expertise is UK’s visa regime.

It’s helpful to May’s objectives that Indian politicians are apprised of this constraint. India’s apex ICT industry body, NASSCOM[3] has energetically lobbied both UK’s Home Affairs Committee and Migration Action Committee to ease restrictions on intra-company transfers for ICT workers. Of course, pricing Indians out of the company transfer route is hardly a welcome sign for Free Trade Britain. But commentators on May’s visit missed the point: treating visas as assets in trade talks gives UK negotiators something to bargain with.

Presumably this was the reason why Mrs May declared UK would not surrender greater visa access at the first go. This is shrewd stuff. For the first time in a long time, the UK has something that corporate India consciously wants. And it’s an early lesson for Liam Fox’s DIT: his department won’t be able to negotiate bilateral trade deals without discretionary control over UK’s visa-issuing machinery. In UK’s trade-bargaining bonanza, work visas will be one of the country’s most valuable commodities.

Beware the politics

From Australian experience, the biggest impediment to smooth FTA negotiations is the fact that events become easily politicised. Australia began talks on a Comprehensive Economic Partnership with India in May 2011, and after nine rounds of negotiations, an agreement is not even in sight. Two events have blighted talks: the Australian Government’s prevarication over whether to sell uranium to India, and attacks on Indian students in Melbourne. Both became big political issues in India, tarnishing Australia’s reputation in India, and frustrating the political will to complete talks.

But where is Australia actually getting stuck? Of course, Australia would like greater access to Indian agricultural markets, but that’s impossible to imagine. Agricultural protectionism is hard-wired into Indian trade policy: average tariffs plus duties are 46%, while bound tariff rates average 120%. As an aside, reserving wide freedom of manoeuvre in multilateral trade negotiations is a trait of Indian trade policy. And it’s a forewarning to UK of India’s extreme caution in relaxing safeguards and controls over ‘strategic’ industries.

In this instance, however, UK will escape being embroiled in the politics of India’s agricultural sector. It’s difficult to spot any substantial opportunity for UK producers in Indian markets — excluding possibly seafood.

Another hurdle for Australian negotiators is India’s patent preference for regional trade deals. Just last month, Australia’s trade minister had to admit that trade talks were stalled, citing India’s alleged preference for a regional trade agreement, the Regional Economic Co-operation Partnership. Some countries will rush to do deals with UK; but judging on form, India is unlikely to be one of them, unless UK can position itself as offering something radically different from other developed economies.

One area where Australia’s travails are directly relevant to UK is in services. India is highly protectionist towards its indigenous service providers. According to this OECD assessment, the most actively protected sectors (outside of rail and air transport) are law, accounting, insurance, architecture and commercial banking. All five are – or should be – of prime importance to UK trade negotiators.

In particular, UK (and the Scottish Government) should take a hard look at India’s £26 billion insurance industry[4], which is both growing fast[5] and increasingly open to foreign capital[6]. It suffers from limited competition, a gigantic licensing regime, and suffocating presence of a state-owned behemoth, the Life Insurance Corporation of India. Times are changing, as the success of non-state-monopoly sectors (for example, mobile telephony) change political attitudes to service-industry competition. But be warned: getting access to India’s insurance market means overcoming the vested interests of public bodies, consciously inefficient private companies — and lunatic levels of licensing.

India’s ‘Licence Raj’ also enjoys rude good health in two professions that London should be eyeing up: law and accounting. Indian nationality is a pre-requisite for a licence to practice law, so only ‘fly-in-fly-out’ provisions are possible. Meanwhile, in-country degree requirements limit foreign accountants to only short-term spells in India.

But since India’s ICT industry has a large, professional component, there’s scope for UK negotiators to work tactically. If they can set parameters on trade in services for ICT first, it should prove easier to work backwards into other services, such as law and accounting, securing natural-person rights sector by sector.

A distinctive negotiating posture

Before UK negotiators dive too far into pre-post-Brexit deal discussions, it would pay to survey India’s distinctive approach to trade bargaining. The first cold douche is to remember that India’s independence struggle was formulated in opposition to open markets. The Swadeshi Movement of 1905–47 specifically targeted British-made goods, and the imposition of free trade policies by UK on Indian textiles. Thereafter, self-reliance became the key-stone of post-Independence Congress economic policy.

This means trade negotiators – especially UK ones – will always tread on thin ice. No Indian trade minister will worry about walking out of talks and reading how he ‘Cocked a Snook at the British’ in the next day’s papers. Snubbing the UK will generate instant political kudos, so expect it. This is the political territory UK trade negotiators are walking into, just in case UK personnel harbour delusions of sentiment.

But it will help to study India’s role in multilateral trade negotiations. Here the key is understanding India’s distinctive ‘developmentalism’. Historically, India has tended to judge the value of trade according to its contribution to internal economic development. This is why, in multilateral trade rounds, India is most comfortable leading coalitions of developing economies against what it perceives as the depredations of free markets.

This means several things for putative trade partners. It means that India's negotiators are predisposed to favour any proposals that overtly contribute to poverty reduction, better health or improved infrastructure. But it also raises the bar: for India, developing countries deserve special treatment in trade deals just because they are less developed[7]. So don’t expect an equitable outcome. And even during negotiations, brace yourself for highly distributive negotiation strategies: a preference for trading quantifiable benefits off against each other, without presumption of mutual gain.

Critically, this developmental mentality extends right across India’s services industry. India opposed the inclusion of services in the Uruguay Round precisely because it believed that GATS would inhibit indigenous development[8]. And in July 2008 – which was the closest the Doha round got to success – it was India’s Trade Minister, Kamal Nath, who earned the soubriquet, ‘Dr No’.

So even during exploratory talks, UK trade personnel should realise that from India’s perspective a fair deal is one that disproportionately benefits India, and one that demonstratively supports India’s development policies.

To be forewarned is to be forearmed, however. One of the most obvious areas for investment in India is in health and medical services, where UK has a built-in advantage over all other developed countries. Approximately 9 per cent of all doctors practising in the UK gained their medical qualification in India. If private UK healthcare providers can mobilise that resource, there is clear potential for UK to take a lead, so long as the systemic constraints to hospital investments can be addressed[9]. And by starting trade and investment talks with the health sector, UK negotiators will set the best possible tone before entering the hyper-sensitive quagmire of finance and professional services.

Start making friends now

At some point, Brexit will solidify and the pre-dawn twilight of Dr Fox’s DIT will being to clear. Then the game will be on. But how should DIT's Delhi contingent spend the intervening period? What will be the mechanics once they get going?

The first thing negotiators will discover is that the process of creating trade policy in India is highly consultative, though not in the strictly political sense. Neither the states nor the Lok Sabha play a role in negotiations, and there is no constitutional requirement to have trade policies or deals ratified by the Parliament of India[10]. So far so good.

Assuming the BJP is still in power, the executive ground should be firm. The party has a curious history of opposing trade liberalisation while in opposition, then embracing it in government. Modi is no exception. His government widened limits on foreign direct investment (FDI) in retail businesses last year — although limits to FDI are hardly the principal break on FDI in in India. Nevertheless, there will still be factions within the BJP who will fight the pragmatists within the party, so perhaps a few diplomatic forays down Church Road are in order. Scotch in hand.

The organisations that the Indian Government certainly will consult are apex trade and industry bodies, who have played a major role in trade policy formulation since 1999[11]. Here the UK is in a sensational position. The heads of the Indian Chambers of Commerce and the Confederation of Indian Industries (CII), are already – and enthusiastically – on board. In a post-referendum visit to UK, the Director General of the CII, Chandrajit Banerjee, claimed a UK-India FTA “almost made in heaven” could be agreed within 12 months.

But the man to court is Ratan Tata. This titan of Indian industry has a greater interest in liberalising UK-Indian trade than any executive in either country. Just consider: since Tata took ownership of Jaguar-Land Rover (JLR), it has become UK’s biggest car manufacturer. And since opening a JLR factory in Pune in 2011, production there has tripled, with four models now rolling of Indian production lines. Ratan Tata is on record as saying he thinks the UK-India trade relationships has ‘unrealised potential’, and wants to leverage UK car-manufacturing expertise overseas. Through Tata Consultancy Services, he also has a direct interest in building UK-India collaboration in ICT. A more powerful advocate for a trade agreement the UK will not find.

Existing business links mean the UK has powerful allies[12] with sound commercial interests in promoting trade liberalisation. British diplomats should be corralling their support now.

The other groups to approach and engage are Indian Civil Society Organisations (CSOs). According to some trade analysts, CSOs exercise by far the most important influence on policy formation for India’s World Trade Organisation negotiations[13]. They will be either good friends or bad enemies during trade-deal negotiations. But diplomats should approach Indian CSOs with respect: many have access to high-calibre research resources; they are vocal and lucid; and they have excellent international connections. According to one analyst, some “have better research capabilities than the relevant government agency”[14].

Most CSOs have an anti-globalisation outlook, although the better-funded groups favour liberal trade policies. If UK decides to adopt a strategic, step-by-step and sectoral approach, then starting with areas such as health or pharmaceutical research will likely help UK diplomats find their feet with powerful CSO stakeholders. Get it wrong and UK is in for the same political horrors endured by multiple US corporations — from Union Carbide to Monsanto.

Lakhs for nothing

As Britain awakes to its new trading freedom, a trade deal with India could prove hugely valuable. The logic is compelling. Both countries can offer concessions that are valuable to the other. Neither country needs to defend a sensitive sector against the others’ offensive interests – except in India’s services sector. And attitudes to competition, regulation and state control are changing. What’s more, three UK industries – ICT, automotive, and health – can boast of so many direct personal links back to India that initiatives to liberalise trade should acquire their own momentum.

But as UK scopes out a potential deal for its post-Brexit makeover, negotiators should be cautious. India has very few comprehensive FTAs. Conversely it has 16 preferential trade agreements (PTAs) currently in force, which is more than Brazil, China or the US[15].

  • Achieving a full FTA would take years, judging by other countries’ experience. Better, therefore, to begin modestly, with the sort of PTAs that India has a track record of completing.

  • Negotiators need a sure grasp of non-tariff barriers (NTBs) in India’s principal states, to ensure that concessions have practical valuable.

  • Equally, companies urging UK to effect an India PTA need to take a political risk approach. Regulations are mostly consistent across Indian states, but anti-trust, labelling, health and consumer legislation is frequently used to stymie imports.

  • In the first instance, negotiators should focus on any sector that has a developmental angle. That will be the easiest sell for an Indian government, BJP-led or otherwise. It will also minimise the risk of negotiations falling victim to an over-politicised event.

Of course, the UK may decide that any concession is worth the political capital of getting tariff reductions on Scotch. That’s something Edinburgh could never achieve, alone or inside the EU. But it would be a pity to concede all too quickly. India’s current economic growth sits on solid, financial foundations. The demand for vehicles, luxury goods and professional services keeps growing. Infrastructure and services need revitalising and upgrading if India is to live up to its political ambitions. Meanwhile, attitudes to trade, regulation and liberalisation are changing.

With astute engagement and a dose of forbearance, the UK could gain preferential access to the fastest-growing sectors of the fastest-growing major economy of the next decade.

[1] Conservative WTO estimates from 2011 suggest 52%. Others estimate 70%. (See, eg, Strategic Arena Switching in International Trade Negotiations. (2007) Wolfgang Blass pp 98). In any case, half of all agricultural output is from small and marginal farm holdings (Langhelle, pp 112).

[2] International Trade Negotiations and Domestic Politics (2016). Oluf Langhelle. pp 112

[3] pp 22.

[4] EY-Confederation of Indian Industry: The Indian Insurance Sector. 2015. pp 9–11. Life insurance value estimated at INR 1.264 billion; non-life insurance at INR 847 billion.

[5] CAGRs are 30% for life; 18% for motor; 30% for health. Ibid, pp 9–11

[6] The Insurance Laws (Amendment Act) 2015 increases the foreign investment capital limit from 26% to 49%. The foreign ownership cap on domestic banks is stuck at 20%.

[7] Langhelle, pp 103.

[8] Blass, Strategic Arena Switching in International Trade Negotiations, 2007. pp 101–106.

[9] These are: high facilities establishment costs, low insurance penetration, manpower shortages, high cost of equipment, and regulatory barriers. See Rupa Chanda, Constraints to Foreign Direct Investment in Indian Hospitals. Journal of International Commerce, Economics and Policy, April 2010.

[10] Blass, pp 134.

[11] Blass, pp 134.

[12] Indian businessmen have played a curiously prominent role in the renaissance of UK’s auto manufacturing. WMG (previously The Warwick Manufacturing Group) was founded by Dhaka-born Kumar Bhattacharyya. It’s commercial relevance is growing, as evinced by the JLR's 'I-Pace' concept.

[13] Blass, pp 136

[14] Blass, pp 136

[15] Langhelle pp110