Spotlight

INTRODUCTION

The conclusion of the UK-India Free Trade Agreement (FTA) on May 6, 20251, marks a pivotal milestone in the evolving economic and strategic relationship between India and the United Kingdom. Concluded after more than three years of negotiations, this comprehensive and forward-looking agreement is the most significant trade deal the UK has entered into since Brexit. For India, it represents a major step toward deeper integration into global value chains. The FTA is set to transform bilateral trade, boost investment flows, and enhance regulatory cooperation, while also setting a new standard for future trade agreements as both nations pursue broader global partnerships. This landmark agreement is expected to boost bilateral trade annually, with significant tariff reductions on 90% of traded goods, including key sectors such as automotive, beverages, life sciences, textiles, and agri-food. Tariffs on iconic British exports like Scotch whisky will be halved and gradually reduced to 40% over a decade, while India will benefit from near-total tariff-free access for 99% of its exports to the UK. The deal also introduces streamlined customs procedures, enhanced regulatory cooperation, and improved market access for services, offering greater legal certainty and protection for cross-border investments.

TARIFF REDUCTIONS AND MARKET ACCESS

At the heart of the FTA are significant tariff concessions. India has committed to reducing or eliminating tariffs on 90% of UK product lines, with 85% becoming fully duty-free within ten years. Key sectors benefiting include:

• Scotch whisky: Duties reduced from 150% to 75% immediately, and then further lowered to 40 percent in ten years.
• Automotive components, medical devices, cosmetics, aerospace parts, and food & drink: Substantial phased reductions. For eg: Tariffs on British automobiles will be lowered from 110 percent to 10 percent, albeit with determined quotas for car exports that include 22,000 high-value British electric vehicles (EVs) in return for a quota of low and mid-range Indian EVs exported to the UK.

In return, the UK will eliminate tariffs on 99% of Indian exports, covering a wide range of goods such as textiles, footwear, processed foods, jewellery, and manufactured products, significantly boosting India’s access to the UK market.

DIGITAL TRADE AND INNOVATION

The agreement embraces the digital economy, removing barriers to e-commerce and digital services. It ensures:

• Legal recognition of electronic contracts and authentication
• Protection against forced transfer of source code
• Provisions for cross-border data flows and data localization, with room for future alignment.
• Establishment of an Innovation Working Group
• Enhanced copyright protections, with India committing to a minimum 60-year term and a review of its copyright regime.

GOVERNMENT PROCUREMENT AND SME SUPPORT

The FTA also ensures:

• Preferential treatment for UK-origin goods and services
• Transparency through a centralized online procurement portal
• Dedicated support for small and medium-sized enterprises (SMEs) via simplified customs, information sharing, and designated contact points

REGULATORY COOPERATION AND DISPUTE RESOLUTION

The agreement promotes regulatory alignment and transparency, particularly in areas such as:

• Sanitary and phytosanitary (SPS) standards
• Technical barriers to trade (TBT) Customs facilitation

A modern state-to-state dispute settlement mechanism is included to ensure fair, timely, and consistent resolution of trade disputes, offering greater certainty for businesses and investors.

BRIEF FACTS ON FTA

Small and medium-sized enterprises (SMEs) stand to gain from new support mechanisms and better access to trade-related information, while service providers will benefit from clearer regulatory frameworks. However, the agreement does not yet address market access for legal services, and its full impact will hinge on effective implementation and ongoing stakeholder engagement. Particular attention will be paid to the final legal text, especially chapters concerning anti-corruption and regulatory standards.

For India, this FTA is a transformative step, setting a new benchmark for future trade negotiations. It is poised to accelerate India’s economic growth trajectory and deepen its integration into the global economy. As the most ambitious trade agreement India has ever signed, it is expected to serve as a gold standard for future engagements. Businesses on both sides are now encouraged to reassess their supply chains, compliance frameworks, and market strategies to fully leverage the opportunities and mitigate potential risks. The success of this agreement may also influence the trajectory of future trade negotiations involving the UK, India, the United States, and the European Union.

IMPACT OF THE UK-INDIA FREE TRADE AGREEMENT: A COMPREHENSIVE ANALYSIS

The UK-India Free Trade Agreement (FTA), finalized in May 2025, marks a pivotal moment in the evolution of bilateral economic relations between two of the world’s most dynamic economies. As the United Kingdom’s third-largest trade agreement—following its deals with Australia and Japan—the FTA underscores the strategic importance of India in the UK’s post-Brexit global trade architecture. For India, this agreement represents the most comprehensive and ambitious trade pact it has ever signed, setting a new benchmark for future international economic engagements.

STRATEGIC AND ECONOMIC SIGNIFICANCE

In 2024, India was the UK’s 11th largest trading partner, accounting for approximately 2.4% of the UK’s total trade. Bilateral trade in goods and services reached nearly $57 billion, reflecting a steady upward trajectory. The FTA is expected to significantly accelerate this growth, with projections indicating an annual increase in bilateral trade of over £25.5 billion and a long-term GDP boost of £4.8 billion for the UK by 2040. These figures highlight the transformative potential of the agreement in reshaping trade flows and economic cooperation between the two nations.

The agreement is particularly timely in the context of rising global trade tensions and protectionist tendencies. It sends a strong signal about the value of open, rules-based trade partnerships in fostering shared prosperity. By eliminating tariffs on 99% of Indian tariff lines and reducing duties on 90% of UK lines, the FTA creates a more level playing field and opens up new avenues for trade and investment.

SECTORAL IMPACT AND EMPLOYMENT GENERATION

One of the most significant aspects of the FTA is its cross-sectoral impact, particularly in terms of employment and supply chain resilience. In India, labour-intensive sectors such as textiles, leather, and agri-food are expected to experience substantial job growth due to improved market access and reduced trade barriers. For the UK, high-growth sectors like advanced manufacturing, clean energy, and life sciences are poised to benefit from enhanced export opportunities and investment flows.

The agreement also addresses non-tariff barriers and regulatory bottlenecks, which have historically impeded trade. By streamlining customs procedures and enhancing regulatory cooperation, the FTA facilitates smoother and more predictable trade, which is crucial for building resilient and diversified supply chains.

ENGINEERING SECTOR

Five-year trend in trade between India and UK

Over the past five years, the trade relationship between India and the United Kingdom has demonstrated a steady and positive trajectory, particularly in terms of exports. India’s exports to the UK rose from USD 8,157.6 million in 2020–21 to USD 13,165.7 million by April–February 2024–25, reflecting a robust growth trend. The most significant annual increase occurred in 2021–22, with a 28% rise, followed by consistent growth in subsequent years, including a 13% increase in the latest period. Imports from the UK also expanded, growing from USD 4,955.8 million in 2020–21 to USD 7,894.4 million in April–February 2024–25. However, this growth was less stable, with a sharp 42% increase in 2021–22, followed by a 6.1% decline in 2023–24 and a modest recovery of 0.8% in the most recent period.

India maintained a positive trade balance with the UK throughout the period, with the surplus widening from USD 3,201.8 million in 2020–21 to USD 5,271.3 million in April–February 2024–25. This indicates a strong and sustained export performance relative to imports, reinforcing India’s growing trade competitiveness in the UK market.

The engineering sector has been a cornerstone of this bilateral trade, consistently contributing between 25% and 29% of India’s total exports to the UK. Engineering exports surged from USD 2,053.8 million in 2020–21 to USD 3,583.4 million in April–February 2024–25. The sector experienced its highest growth in 2021–22 at 48%, with continued expansion in the following years, including a 9.6% increase in the latest period. On the import side, engineering goods from the UK rose from USD 2,638.3 million to USD 3,904.2 million over the same timeframe. While the growth in engineering imports was steady, the trade balance in this sector remained negative, indicating that India imported more engineering goods from the UK than it exported. The engineering trade deficit fluctuated, with the narrowest gap recorded in 2021–22 at just USD -4.7 million, but widened again to USD -320.8 million in the latest period.

Despite the persistent deficit in engineering trade, the sector’s stable share in total exports underscores its strategic importance in India’s export portfolio. The data ( below Table 1)suggests that while India has made significant inroads into the UK market, particularly in engineering, there remains a need for targeted policy interventions to enhance domestic value addition, improve competitiveness, and reduce reliance on imported engineering components.

Table 1: Five Year trade pattern between India and UK

FISCAL YEAR 2024-25

The engineering sector offers a compelling case study of the FTA’s potential impact. In FY 2024–25, India’s engineering exports to the UK reached USD 4.01 billion, marking an 11.7% increase over the previous year. The UK has emerged as India’s sixth-largest destination for engineering goods, accounting for 3.4% of total engineering exports. Key export items include electrical machinery, iron and steel products, internal combustion engines, auto components, and industrial machinery.

The momentum in engineering trade was evident even before the FTA came into force. In March 2025 alone, engineering exports to the UK surged by 32.9%, reaching USD 429.1 million. This growth is expected to accelerate further with the elimination of tariffs—previously as high as 18%—on a wide range of engineering products.

Historical Data on Engineering Exports to the UK (US$ Billion)

PROJECTIONS AND OUTLOOK

Assuming a conservative annual growth rate of 12–15%, India’s engineering exports to the UK are projected to nearly double over the next five years, reaching USD 7.55 billion by 2029–30. Product-wise projections indicate robust growth across key categories:

PRODUCT-WISE PROJECTED EXPORT FIGURES (US$ MILLION)

Assuming an average annual growth rate of 12-20% (depending on historical trend and tariff reduction impact), the following table provides a projection for key engineering products over the next five years:

These projections are based on the assumption of stable economic conditions and continued policy support. The removal of tariffs, coupled with rising demand in the UK for high-quality engineering products, positions India as a key supplier in this segment.

INDUSTRY CONCERNS

a) UK is considering safeguard to impose duty

According to a WTO notification on October 1, 2024, the UK is currently reviewing its safeguard measures on imports of Category 1 steel products, which include hot-rolled flat and coil steel—a key export item for India. This review, initiated by the UK’s Trade Remedies Authority (TRA) in February 2024, was prompted by changes in domestic production capacity, particularly due to Tata Steel UK’s shift to greener steelmaking technologies. The TRA is considering a temporary nine-month suspension of the safeguard measure and has also proposed restructuring the import quota system. Under the proposed changes, the quota would be split into two sub-categories, with a 40% country cap on one of them to prevent over-reliance on any single exporter.

If these measures are implemented, Indian steel exports could face significant restrictions. Exceeding the quota limits would trigger a 25% tariff, making Indian steel less competitive in the UK market. This could impact a substantial portion of India’s steel exports, particularly in hot-rolled flat products, which are widely used in construction, automotive, and manufacturing industries. The ongoing review has not yet resulted in a final decision, but the potential policy shift poses a serious concern for Indian exporters.

b) Carbon Border Adjustment Mechanism (CBAM)

The UK government has confirmed that it will introduce its own version of CBAM starting 1st January 2027. This mechanism is designed to place a carbon price on certain emissions-intensive goods imported into the UK, ensuring that these imports face a comparable carbon cost to domestically produced goods under the UK Emissions Trading Scheme (UK ETS).

The anticipated benefits of the FTA could be significantly undermined by the UK’s planned implementation of a Carbon Border Adjustment Mechanism (CBAM). If sectors like steel, aluminium etc.—key components of engineering exports—fall under CBAM’s ambit, they may face additional carbon costs that neutralize the advantages of tariff-free access. Therefore, it is imperative that the Indian government proactively addresses CBAM during bilateral FTA negotiations to ensure that affected sectors are either exempted or adequately compensated.

BROADER IMPLICATIONS AND CONCLUSION

Beyond trade volumes, the FTA is expected to enhance investor confidence by providing greater legal certainty, transparency, and protection for cross-border investments. It also introduces new support mechanisms for small and medium-sized enterprises (SMEs), enabling them to participate more actively in international trade.

The India-UK Free Trade Agreement stands as a milestone in bilateral economic relations, offering a robust framework to elevate India’s export ambitions. Particularly for the engineering sector—which already contributes a quarter of India’s total merchandise exports—the FTA’s tariff eliminations and regulatory easing are expected to unlock substantial growth. Assuming a conservative incremental growth rate of 12–15% annually, driven by improved market access and rising bilateral trade interest, India’s engineering exports to the UK are projected to rise from the current US$ 4 billion to approximately US$ 7.55 billion by 2030. This trajectory not only strengthens India’s foothold in a key developed market but also significantly contributes to the national target of achieving US$ 300 billion in engineering exports by 2030. By fostering deeper supply chain integration, encouraging technology transfer, and enhancing competitiveness, the FTA reinforces India’s broader vision of becoming a global manufacturing and export powerhouse.