Unlocking the potential for future India-UK trade and development

About

The UK and India are important trading partners. Both countries offer major markets for each other's exporters and investors. At a time when the UK completely redraws its international trade policy, following its exit from the European Union, it is imperative to study trade policy options that will unlock the full potential of the UK-India partnership.

A substantial part of goods trade between the UK and India is based on a Generalised System of Preferences (GSP) scheme, which allows Indian exporters to trade with the UK (and the EU) on more favourable terms (i.e. lower import tariffs) than what is established under the agreements with the World Trade Organisation. However, the GSP (the EU’s version up until 2020) is an imperfect system in several dimensions as it grants more favourable treatment only in selected sectors, on a temporary basis, and can be revoked from countries and sectors that become internationally competitive. It is important to analyse the incentives for Indian firms to participate in trade that emanate from the GSP in order to address potential detrimental effects.

Going forward, the UK Government is keen on negotiating Free Trade Agreements (FTAs) with new trade partners, including India. An FTA will allow the two economies to be more deeply integrated compared to the GSP system, not least because of the potentially much wider scope of an FTA, which could also encompass services trade, investment and other policy areas from intellectual property rights to digital trade.  An FTA could guarantee the certainty of a long and stable relationship for investors and traders and reduce the costs of trade.

This project – led by researchers at the UK Trade Policy Observatory and the Institute of Development Studies – will provide the first detailed analysis of how firms respond to the challenges created by the GSP, in particular to episodes of removal of the preferential treatment, which increase the tariffs applied to Indian imports in the UK. The project will then examine the impacts of the switch from the GSP to a UK-India FTA, and evaluate the development outcomes of these changes in trade, such as the effects on Indian employment rates, household income and expenditure.

Research Design

The researchers will:

      1. Perform firm-level analyses to examine how the loss of GSP preferences impacts on firms' performance, skill composition, value chain activity, and trade. This will shed light on the pros and cons of the GSP for India-UK relations which, in turn, will inform policy makers about short-term actions that can boost India-UK trade and investment.
    2. Analyse the impacts of the switch from the GSP to a UK-India FTA, using a partial equilibrium model at the sector-level. This modelling exercise will create evidence to inform a future UK-India FTA and analyse the factors that could incentivize the adoption of certain scenarios.
    3. Estimate the potential impacts of the switch from the GSP to a UK-India FTA on development outcomes of poverty and employment, by modelling the micro-determinants of welfare using panel household-level data for India.

The findings from these three strands of research will provide much-needed guidance in designing the post-Brexit UK trade policy. Both short- and long-term horizons will be analysed, giving a varied and detailed list of options to both UK and Indian policy makers for strengthening and improving the UK-India partnership.

The project will therefore make a contribution to the study of firm behaviour, productivity, trade, investment and development across disciplines, primarily in the fields of economics but also to development studies and international political economy.

Research findings and policy lessons will be shared through research and policy-focused publications, blogs and knowledge exchange events.

Further Information

This project is undertaken by a UK-India consortium, including researchers from the University of Sussex Business School, the Institute of Development Studies, the Indian Institute of Foreign Trade and the Delhi School of Economics.

The UK team (University of Sussex and IDS) includes:

The project began in February 2021 and will last for three years, with funding from the Economic and Social Research Council and the Indian Council of Social Science Research.

Project Outputs

Policy blogs: