Unlocking the potential for future India-UK trade and development

Lead Research Organisation: University of Sussex
Department Name: University of Sussex Business School

Abstract

This project aims at understanding which factors stimulate or hamper economic relations between the UK and India. Both countries are important markets for each other's exporters and investors, and it is imperative to unlock the full potential of the UK-India partnership. This will not only allow UK firms to perform better in India but, importantly, there can be crucial repercussions on development outcomes in India.

First, we will assess in detail the strengths and weaknesses of the system currently governing trade between India and the UK, i.e. the Generalised System of Preferences (GSP) of the EU. The GSP allows Indian exporters to trade with the EU (and the UK) on more favourable terms (i.e. lower import tariffs) than what established under the agreements with the World Trade Organisation. The GSP, however, is an imperfect system, because it grants this more favourable treatment in selected sectors and on a temporary basis. Further, the treatment is revoked from countries and sectors that become internationally competitive. Our contribution is to 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, in the India-UK case, increase the tariffs applied to Indian imports in the UK. We will study how firms adjust their trade activity (entry and exit from exporting, for Indian firms; adjustment of which products are imported from India, for UK firms), how firms' productivity responds to changes in the GSP (Indian firms are expected to become more productive to keep selling to the UK; UK firms are expected to become less productive as they face less competition from India), whether the labour force that Indian firms employ becomes more or less skilled (increased in productivity might require more skilled labour). This analysis will inform policy makers about how to address the challenges brought by the GSP system in the short term.

Next, we will evaluate long term options for future UK-India relations, and for this we will assess the effects of the UK and India entering in a Free Trade Agreement (FTA). An FTA will allow the two economies to be more deeply integrated than in the GSP system, it will guarantee the certainty of a long and stable relation to investors and traders, and will reduce the costs to trade with each other (both Indian and UK import tariffs will be reduced). We will simulate the impact of the UK-India FTA for both manufacturing and services sectors: the analysis on services, in particular, will provide important insights for both UK and Indian policy makers, given the relevance of services for both economies. We will make use of a state-of-the-art model created by us and we will assess the impact of the FTA on output, trade and prices. We will take into account several liberalization scenarios, characterized by larger or smaller elimination of both tariff and non-tariff barriers to trade between India and the UK, and we will assess the impact of the UK-India FTA under various Brexit scenarios.

The third part of the analysis we will undertake is dedicated at examining the development outcomes of the policy changes examined in the first two part of the project (GSP trade preferences removal and switch from the GSP to an FTA). We will evaluate how the changes in trade brought by these policy changes are reflected in changes in employment and how the latter, in turn, can affect Indian household's income and expenditure (hence poverty rates). We will use detailed Indian household level data for this analysis. Finally, we will investigate the likely reactions and sentiment of Indian policy makers and businesses to the policy changes examined and proposed in this project We will collect information on their views by submitting a list of questions and we will evaluate the likelihood of implementation of the policy changes that would be required to strengthen the UK-India relation

Planned Impact

This research has two main areas of impact: conceptual (the intellectual contribution to the relevant fields of expertise) and instrumental (the contribution to policy debates and practice).
The project has two specific impact objectives:
(1) Improved understanding of the potential for a strong economic partnership, including opportunities for the immediate future of trade between India and the UK, and from a fuller integration of their respective markets through a Free Trade Agreement (FTA). This will inform governments, policymakers and donors both in the UK and India. Academics and research organisations will also benefit from the evidence created under the project.

(2) Exploring the development impact and political economy in relation to the potential scenarios for future UK-India trade. This will address the interactions between SDG 17 (Partnerships for the goals), SDG 9 (industry innovation and infrastructure), and SDG 1 (no poverty). It will inform government actors about how to best inform dialogue between governments, associations and businesses while addressing the above SDGs. The Ministry of Commerce & Industry in India (MOC&I), UK International Trade Committee, trade and industry association, and the media in the two countries are the main audience. It will also create and analyze evidence on the political economy factors that help identify actual likelihood of implementation.

In addition to the research team, which will benefit directly from the opportunity to work collaboratively, across disciplines, the research has two types of (external) beneficiaries: academic beneficiaries and policy beneficiaries.
-Academic beneficiaries. This research will make a contribution to the broader field of study of trade and development across disciplines, and primarily to the fields of economics and development studies. Academic beneficiaries will include researchers and research networks in the UK, India, and elsewhere interested in the future of UK-India trade and its connections to international development. The research will also be of interest to those studying the rising powers in global development.
-Policy beneficiaries. Main policy target groups for this objective include governments in India and in the UK, multilateral agencies such as the United Nations, and donors. This research will target and seek to offer contributions to policy-makers and practitioners in the fields of trade, investments and development.

How will they benefit? Research findings and policy lessons will be shared through published materials. Outputs will comprise research and policy-focused publications, and blogs. We will also invite a selection of experts to events to be hosted at Sussex and IDS, offering an opportunity for joint learning and exchange

Publications

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