A global emerging markets expert takes stock of the challenges encountered by investors during trade between the UK and India and the efforts made on both sides to pave way for stronger ties in the future.
Ahead of her visit to India in November 2016, Prime Minister of the UK, Theresa May is understood to have said that India is the UK's most important and closest friend and a leading power in the world, which is on the path of far-reaching reforms, led by Prime Minister Narendra Modi.
There are many synergies that support a stronger India-UK relationship, including democratic values, a common legal and administrative history, and English as the common language. The Indian community settled in Britain has helped strengthen the bilateral ties over decades. Today, India is the third-largest investor in the UK and the UK is the third-largest G20 investor in India.
However, the slowing down in bilateral investments in the last two years sets the stage for both countries to refresh their outlook and work more closely for improving trade, investment and economic collaboration in the coming years.
The UK is one of India's top trading partners. According to estimates from the Indian government, total trade value with the UK was worth $14.02 billion in 2015-16, of which $8.83 billion was in exports from India and $5.19 billion was in imports. However, the percentage growth in total trade between the two countries has remained constant, with a marginal upward trend from FY10 to FY16.
has opened up opportunities for the two nations to negotiate trade deals. According to a research paper by the Commonwealth, titled 'Brexit: Opportunities for India', a free trade agreement between the UK and India would increase trade between the countries by 25 per cent. If implemented after Brexit, the UK's exports to India would increase by 50 per cent, from $5.2 billion to $7.8 billion. An actual treaty cannot be signed between the parties until the UK leaves the EU, but an interim understanding between the two countries is currently building up.
Ease of doing business: a key requisite to deepen ties
India ranks 130 in the World Bank Group's Doing Business Ranking 2017, rising by a position over 2015 on account of the pro-investment reforms taken by Prime Minister Narendra Modi. India's ranking improved in two parameters: Securing an electricity connection and enforcing contracts. On the other hand, the UK's ranking has fallen by a position, from six to seven; however, it retains its ranking as one of the top countries in the G7 to do business, driven by the government's aims to cut red tape and reduce corporate tax. The UK government's target is to be amongst the top five in the ease of doing business ranking, while the Government of India has announced its commitment to be amongst the top fifty within a few years.
Amongst the challenges cited by large UK companies looking to invest in India are: An inconsistent quality of infrastructure across the country, laws around land acquisition for mega/large-sized projects, the judicial system, an uncertain tax environment and high taxes, regulatory complexities for importing goods, corruption etc.
Changing Indian business landscape
Many of the investor concerns have been addressed by the Indian government since 2014 through an ambitious programme of regulatory and tax reforms. In fact, the UK investors have applauded the Indian government's eBiz initiative, which integrates various central government services to facilitate fast-track clearances and improve the overall business environment. The introduction of the Goods & Services Tax (
) as a single tax structure is one of the biggest tax reforms undertaken by the government in decades and has been welcomed by investors globally. The passage of the Insolvency and Bankruptcy Code, 2016 has also been appreciated by investors, as it prescribes simplified exit procedures, enables time-bound settlement of insolvency and ensures a reliable and steady supply of credit.
The liberalisation of the FDI policy in sectors such as defence, rail infrastructure, construction development, insurance and medical devices, and simplification of procedures have also boosted the flow of FDI into the country since 2014. On the tax reform front, the emerging trend of corporate tax rate reduction and base broadening in G20 economies can also be seen in both India and the UK.
Indian businesses investing in the UK dealing with post-Brexit uncertainty
EY's Capital Confidence Barometer (CCB) 2015 showed that the UK has fallen out of the top five investment destinations for India for the first time in seven years. While the full impact of Brexit cannot be predicted as yet, pressure on investment clouds the UK's longer-term economic projects. For Indian business houses, the UK earlier served most often as a gateway to Europe, but with Brexit, this is changing. Possible increase in tariffs will impact the competitiveness of Indian products and increase trade costs. This will require Indian businesses to rebuild their strategies for the UK market.
Besides the uncertainty around Brexit, the other challenges for Indian businesses looking to establish or expand operations in the UK have been stiff regulations on labour mobility, salary thresholds, tax payments, trading across borders and disclosures with regard to foreign worker employment ratios.
That said, both countries have taken steps towards learning from each other on the ease of doing business. For example:
- A memorandum of understanding (MoU) has been signed on ease of doing business, which will harness the UK's expertise to support India's efforts to climb the World Bank's Ease of Doing Business ratings.
- MoUs have been signed on intellectual property rights and ease of doing business towards sharing of best practices and technical assistance on certain parameters.
- A fast-track mechanism has been established to facilitate the UK's investments in India and for the UK companies in India and to set up an India-UK partnership fund under the National Investment and Infrastructure Fund (NIIF) to facilitate global investments through the City of London for Indian infrastructure projects.
Overall, in our discussions with business leaders in India, there is a strong appetite to invest in the UK for trade, technical collaboration and knowledge collaboration. Recently, both countries have taken significant steps towards bolstering this collaboration:
- The Newton-Bhabha Fund has been created with an increase in research collaboration from $1.25 million to $187.17 million in science and education.
- India has agreed to establish the India-UK Clean Energy R&D Centre on solar energy with joint investment of $12.2 million.
- A new antimicrobial resistance initiative with joint investment of $18.4 million is also being launched.
The UK investors are keen on investing in India, and the UK values India as a strategic trading partner going forward. Both countries are continuously working on ease of doing business and have taken some significant steps to address the concerns of global investors and strengthen bilateral ties. Brexit is indeed a significant incident for the UK to strengthen its special relationship with India and revive preferential bilateral trade and investment agreement.
While India needs to accelerate and implement its economic and tax reforms, the UK will have to address concerns around greater mobility and set clear trade priorities between the two countries.
Prime Minister Theresa May, during her visit to India, said that it is important for both countries to prioritise each other's priorities. That summarises the appropriate way forward for India and the UK to strengthen their bilateral bond.
The above is a synopsis of one of the chapters from ′Winning Partnership: India-UK Relations Beyond Brexit′, edited by India Inc. Founder & CEO Manoj Ladwa.
Rajiv Memani is Chairman & Regional Managing Partner of EY India and Chairman of EY's Global Emerging Markets Committee.