All eyes on India-UK FTA as Starmer storms to power

The Labour party returned to power in the United Kingdom after 14 years with a landslide victory on Thursday, with party chief Keir Starmer set to replace Rishi Sunak as prime minister on Friday, 5 July.

The Labour leader will formally be appointed by King Charles at Buckingham Palace on Friday though forming a new government will take longer.

The party had secured 412 of the 650 seats in the House of Commons, comfortably past the 326 needed for a majority, while the Conservatives were languishing with 120 seats, their worst ever performance.

Lawyer-turned-politician Starmer has rebuilt Labour since his predecessor Jeremy Corbyn led the party to its worst performance in 80 years in 2019.

Sunak, who had caught everyone by surprise in May when he called the snap polls in July, has conceded defeat. The Conservative Party was not required to call for an election until January next year

So what does the Labour party’s win mean for India?

Starmer and incoming chancellor of the exchequer, Rachel Reeves, are likely to prioritize measures to stimulate economic growth at home while seeking to establish himself as a statesman abroad, Bloomberg reported.

The lawyer-turned-politician, who has been an opposition leader for four years now, promised during his campaign trail that Labour would “build and strengthen modern partnerships with allies and regional powers.”

“We will seek a new strategic partnership with India, including a free trade agreement, as well as deepening co-operation in areas like security, education, technology and climate change,” the party’s manifesto said.

Ajay Srivastava, founder of think tank Global Trade Research Initiative (GTRI), said the new Labour government may recognize the substantial benefits of the India- UK Free Trade Agreement (FTA), as it opens access to a large and growing Indian market, bypassing high tariff barriers.

“This could set the stage for the agreement to be signed as early as October,” Srivastava said.

“Labour will notice that the FTA offers a significant price advantage to UK exporters, potentially boosting their exports almost immediately. For proof, it can look at he steady improvement in Asean, Japanese, and South Korean exports to India following their respective FTAs with India,” Srivastava said.

The India-UK FTA is nearly finalized, and with a few minor adjustments, like curtailing the number of visas for India professionals, the Labour may likely give its approval.

Foreign trade analysts, however, said India must focus on two issues in the FTA.

“First is the Carbon Border Adjustment Measure (CBAM). As India finalizes its FTA, it must seek clarity on how CBAM will impact its exports. Without this, the benefits of tariff reductions could be negated by imposing high carbon taxes,” Srivastava said.

CBAM is a policy designed to level the carbon cost between domestic products and imports, preventing companies from avoiding stricter emissions regulations by moving production abroad.

“CBAM would result in the UK gradually imposing higher taxes on imports based on their carbon footprint, potentially far exceeding its current average tariff rates of less than 2%. “While the FTA might reduce or eliminate tariffs, Indian exports could still face hefty carbon taxes, unlike UK exports to India,” Srivastava said.

Trade analysts also emphasized on the need for caution with non-traditional issues such as labor, environment, gender, and intellectual property rights, noting that India has historically resisted incorporating these into FTAs due to required domestic policy changes.

Ajay Sahai, director general and chief executive of the Federation of Indian Export Organisations (FIEO), said “Restricting immigration into the UK is on the agenda of both the Tories (Conservatives) and Labour, but considering an ageing population in the UK and the fact that India is a part of the Commonwealth and an English-speaking nation, Indian professionals will get their fair share of visas.”

While Sahai highlighted concerns about the potential imposition of non-tariff barriers, particularly those related to environmental and sustainability standards, Srivastava pointed out that even if the UK eliminates tariffs in sectors such as textiles, Indian exports might still need to meet stringent UK sustainability requirements, which could negatively impact labor-intensive sectors.

Srivastava stressed that India must negotiate firmly on these issues to ensure that market access gained through tariff elimination is not compromised by other barriers.

“It’s crucial for India to proceed cautiously, engaging in thorough consultations and strategic negotiations to protect its interests, aiming for a balanced agreement that benefits both countries while safeguarding Indian exporters from unfair disadvantages,” Srivastava added.