The prospects of UK-India economic ties

While the trade relationship is underperforming, the UK-India bilateral investment partnership is very strong


UK businesses are much more bullish about India than they were three years ago. Photo: AFP
UK businesses are much more bullish about India than they were three years ago. Photo: AFP

On his first visit to India in his new role as the UK’s international trade secretary in August, Liam Fox said the UK and India’s “current trading relationship is strong but, more importantly, there is so much future potential”. This is backed up by the fact that UK Prime Minister Theresa May made India the destination of her first bilateral visit outside the European Union in November. Add to that the fact that there is a regular flow of ministerial visits in both directions—including Union finance minister Arun Jaitley, who is currently in London—and the signalling about the importance and intensity of the India-UK economic relationship is clear.

While in London, the finance minister will meet lots of UK businesses of all sizes and from across sectors. Some already invest significantly in India, and some are considering their investment options.

What he is likely to hear is that while the trade relationship is underperforming, the UK-India bilateral investment partnership is very strong, and will get better. The UK industry is enthusiastic about the positive short-term impact of GST (goods and services tax) and the medium-term impact of demonetization in creating an even more modern, transparent, and vibrant Indian economy.

Investment: can do better

The UK has been the largest G20 investor in India since 2000. UK companies currently employ around 788,000 people across India—one in 20 of the total organized private sector jobs in the country. At the same time, India is the third-largest investor in the UK. Indian companies invest more in the UK than the rest of the EU combined. More than 800 Indian companies currently operate in the UK, employing more than 110,000 people.

So, how do we improve the already strong bilateral investment relationship?

Improving the operating environment in India will make the biggest difference in accelerating FDI (foreign direct investment). In a submission the UK-India Business Council and Confederation of British Industry sent to Jaitley in January, UK businesses identified the four areas that would bring the greatest benefit to the Indian economy:

l a reduction of corporate tax rates to the 25% Jaitley signalled in his 2015 budget.

l a smooth and fair implementation of GST. Businesses expect teething issues, but are confident that it will significantly simplify the ease of doing business. At the same time, it is important to note that there are a number of issues associated with the introduction of the GST, including the treatment of alcohol, petroleum products, and services (such as insurance) that are delivered pan-India. By adjusting the current plans for these sectors, the government will derive even greater benefits for the Indian economy

l a simpler, fairer and more predictable tax regime

l medium- and long-term clarity in areas of major government expenditure, for example defence, and on plans for infrastructure development.

Trade: must do better

We should also be focusing on improving the level of bilateral trade.

On the surface, the UK-India trade statistics look good. The bilateral trade grew by 170% between 2004 and 2014. But India’s overall trade grew by 800% in the same period. In more recent times, UK-India trade actually fell by around 8% in 2014-15; India’s trade with Germany, Italy and France fell by even more that year.

Of course, statistics only capture visible trade and don’t take into account the holistic nature of bilateral trade. For example, global supply chains see aeroplane or car engines made in the UK that are sent to France/Germany for assembly before being exported to India.

A comprehensive UK-India economic partnership will boost direct trade. However, Indian and UK companies shouldn’t wait for an agreement to be reached; the opportunity is now.

Indian companies can buy goods and services 15% more cheaply from the UK than last June due to the depreciation in the sterling. Indeed, for those seeking to invest in UK businesses to acquire technology, talent and access to markets, the same 15% discount applies. And Indian businesses will also find UK companies that are increasingly looking to India for partnerships.

At the UK-India Business Council, we have seen a sharp increase in the number of Indian businesses seeking to import from the UK. Every week we talk to around 25 Indian businesses looking to source from Britain, and we engage with over 200 UK businesses every week that want to supply these Indian businesses.

And, of course, there are excellent opportunities to export to the UK. The economy remains fundamentally strong—it is the fifth biggest economy in the world, the second fastest growing market in the G7 and one that, in the words of Theresa May, is “bold and outward looking”.

As well as hearing from UK businesses how the bilateral commercial relationship can grow, Jaitley will also hear much well-deserved praise for the reforms he and his colleagues have introduced since coming to power in 2014.

Much has been achieved. UK businesses are much more bullish about India than they were three years ago, and they are committed to helping India achieve its ambitions as it enters the next phase of reform and expansion.

Richard Heald is the chief executive officer of the UK India Business Council.

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