Country Profile: United Kingdom (UK)

• The UK economy continues to face an ambiguous environment with respect to its membership with EU, and high risks to business and investor confidence
• The UK is expected to join Italy as the slowest-growing economy in the EU by next year.
• Bilateral trade between Britain and India stands at US$ 25 billion including services trade. India is an important trading partner and even after Brexit, UK-India trade relations are expected to get affected in a moderate manner.
• The two countries can certainly explore an FTA, but only after UK’s position is clear vis-à-vis its exit from the European Union.

The UK economy continues to face an uncertain future as far as its membership of the EU is concerned. Brexit remains a substantial drag on economic activities. A majority of forecasters anticipate risks to confidence and investment from the Brexit process, with consumerism remaining constrained because of weak wage growth.

Consumer debt to GDP has been rising, buoyed by double-digit growth in unsecured lending. With banks pulling back from unsecured lending, the Bank of England worries this could weaken the resilience of the banking sector. Per capita income of UK is continuously declining in last three years from US$ 43,000 to US$ 39,887 at present. Sullen business investment, coupled with receding momentum in key trading partners such as the EU and US, will continue to restrain the economy. The robust labour market should cushion private consumption, while a more expansionary fiscal stance may also lend a helping hand.

Otherwise, the economy of the United Kingdom is highly developed and pro market. It is the fifth-largest economy in the world measured by nominal gross domestic product (GDP), ninth-largest by purchasing power parity (PPP), and twenty second-largest by GDP per capita, comprising 3.5% of world GDP. The United Kingdom is the 10^th largest export economy in the world and the 11^th most complex economy according to the Economic Complexity Index (ECI).

Macroeconomic Outlook of UK

The EU has finally set a deadline of October 31 for the UK to leave the economic block. The prospect of a no-deal Brexit looms large over the economy, with Bank of England monetary policy committee member Gertjan Vlieghe predicting a prolonged period of record low interest rates, collapse in demand and higher cost of imports due to a fall in pound value or imposition of tariffs.

Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown. Risks also remain skewed to the upside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter growth in UK could see businesses continue to struggle. The UK will plummet to the bottom of the European economic growth league next year to join Italy as the slowest-growing economy in the EU.

Figure 1: Trade Snapshot of UK

Trade basket of UK

Source: ITC Trade Map, 2019

Export and import partners of UK

Source: ITC Trade Map, figures in US$ billion

The economy of United Kingdom exports 363 products with revealed comparative advantage having value of Balassa Index more than 1. It dropped to 8^th position in the World Economic Forum Competitiveness Index in 2018, with Brexit expected to further exert downward pressure on its attractiveness towards international trade.

India-UK economic and trade relations

India’s total trade with UK increased at a CAGR of 2.4% in last five years. India’s top exports to UK include gems and jewelleries, medicaments, waste oils, footwear, garments, turbojets, parts of aircrafts and spacecrafts, automobiles. On the other hand, India’s imports from UK include silver, gold, ferrous waste and scraps, diamonds, petroleum coke, turbo propellers and turbojets. India has traditionally maintained a trade surplus with the UK, with total exports at US$ 9.78 billion and imports at US$ 7.05 billion in 2018.

IT and related professional services are by far the largest export from India to the UK. India therefore has a major interest in signing a bilateral social security agreement to ensure social security of its workforce.

Medical tourism is identified as a key area of interest. Traditionally, India has been strong in medicine, ayurvedic treatments, Unani and Siddha fields. As India’s pharma industry moves from an emphasis on generics to being more R&D driven over the coming decade, policy clarity on clinical trial compensation particularly in determining causality of injury and costs and liabilities.

Audio-visual services, such as in gaming & visual effects, and broadcasting, are seen as specific areas of opportunity. Also, India has comparative advantage in film content and distribution services, which definitely have a potential to increase export value in coming years. Ministry of External Affairs can play a catalyst here in promoting Indian films in UK, which have already marked their presence to an extent.

Based on current as well as potential future prospects, the Indian and UK Government have identified five goods sectors as “sectors of interest” – aerospace, chemicals, automotive, food and beverages and life sciences.

The chemicals sector is one of focus sectors for India & UK, as both trade heavily when it comes to organic and inorganic chemicals. In the diverse food and drink sector, the UK’s export specialisation is predominantly whisky, which comprised of over 80% of the UK’s exports to India in this sector. UK’s auto exports concentrate on intermediate goods such as parts for large motor vehicles and engines. Similarly, the aerospace sector includes engines and their components, aircraft and helicopter parts, spacecraft and other aeroplanes.

In the services industries, UK education is likely the most important sector, followed by travel and tourism, and ICT. Even India would like to attract students for its education sector, given the emphasis on Study in India in the recent budget. The big areas of bilateral potential also include financial services, business and professional services. India will too be looking for concessions on Indian skilled labour accessing UK markets.

Figures in US$ billion

Source: ITC Trade Map

The two nations can look forward to a potential FTA, but negotiations can only proceed once the UK has put its own house in order and there is clarity on the UK’s position vis-à-vis Brexit.