“We cannot serve our own interests and those of out traditional friends in the way we would like unless we secure a substantial increase in our trade and a stimulus to growth and investment.” Michael Noble , minister of trade, in speech to Commonwealth Chambers of Commerce in London, 8 June 1972 after the ending of the 1939 Indo-British Trade Agreement.
The statement highlights the irony in the reason as to why trade negotiations between India and Britain in the most recent round have failed. Theresa May’s meetings with presidents and prime ministers till now have only served the purpose of self assurance, with her hoping that her teammates don’t leave when the music stops playing. While one may attribute the factor of ‘uncertainty’ to the failure of talks, there is much more than meets the eye in the negotiations between India and UK. This article will explore this delicate relationship and why Theresa May conceding to Mr. Modi’s demand during the ongoing Brexit negotiations will be beneficial for both.
Divergence of Interests
It is paramount to explain why Britain doesn’t hold the bargaining chip in the first place. Despite involvement between the countries, India and Britain haven’t seen eye to eye in their strategic interests since independence. To start with, one must explore the complex trade history that shapes sentiments between the two. At one point in time, one was the most prosperous country with a large export industry contributing the most to to the World GDP and the other, a failed state riddled with crime where most of the population of 2.5 million lived in poverty. The year was 1500 and the countries were India and England respectively. Up until the 1700s, India’s share of the world economy was 23% (as large as whole of Europe put together). When the British left India in 1947, the country contributed only 3-4% to the world GDP due to an active policy of massive deindustrialisation practiced by the British. Foreign policy between the world biggest coloniser and its most prized colony since has only diverged.
It is interesting to take a look at the trade relations and explore why the two diverged from engaging post independence. Lipton and Firn make an astute point about a rising power and a declining one -‘As the rising power’s needs and horizons expand, her markets, diplomacy and defence policy all feature the replacement of policies set in place by the declining power’. At the end of the WWII, Britain became heavily indebted to India with its pound sterling bond issuance to India at Rs. 17,330 million (1300 million pounds). It was decided that the debt would be repaid to India in instalments for a full payment would decrease the per capita income in Britain by several percentage points. India used these reserves to import goods from Britain up until the 1960s when the reserves depleted. The Indian economy then practiced an inward looking policy of import substitution and industry protection for any other policy for reminiscent of the British Raj. In 1960-70, the share of India in total UK exports fell 78%, as against a 52% average fall for ex-colonies in the former metropolis
Prime Minister Nehru launched the Non Aligned Movement and took aid from both USSR and US on conditions that the aid be spent on imports from the respective countries. This was crucial in the country’s relations with Britain for two reasons: it shifted trade dependence from Britain in more than 200 years; and since India could not hold USSR and USA accountable for involvement in events that should have been criticised (Czechoslovakia and Vietnam respectively), it used non-superpowers such as Britain as a scapegoat to exhibit its non-aligned and virtuous status. The shift in trade dependence on Britain deepened further in 1991, when at the height of its reserve crisis, India was forced to open its economy to the world and saw tremendous growth both in infrastructure and investments.
The events mentioned above led to a divergence of interests between Britain and India and have made arriving at common grounds during any current negotiations tougher. Militarily and economically, India is stronger than ever. Unlike the 1960s and 1970s, when India was weak militarily and faced imminent threat on its borders from Pakistan and China, it maintains an active policy in South East Asia with neighbouring allies today and no longer depends on aid from superpowers for border protection. The Modi administration has enforced first prime minister Jawaharlal Nehru’s views on maintaining an active presence in Asia even further during the past two years. Britain, on the other hand, has receded from its role of a global leader in the new global order. Since the late 1950s, its policies have concentrated on becoming part of multiple western-oriented organisations, shifting focus from the middle east and south-east Asia which was at its core for more than three centuries. Through the ages, the two countries have grown apart for strategic interests by aligning themselves to regional trade blocs proving Theresa May’s statement of a long, beneficial mutual history to be nothing but hollow.
There are multiple reasons why India holds an upper hand in negotiations with Britain. India has surpassed China as the world’s fastest growing economy and despite the recent demonetisation drive, the IMF predicts the country to grow at 7% in FY17 compared to China’s 6.7% during the same time. India is UK’s third largest source of FDI and directly accounts for 9000 jobs. There are more than 800 businesses that are owned by Indians (including iconic brands like Jaguar and Land Rover) which employ nearly 110,000 people in the UK. According to the Grant Thornton India Tracker 2016 Report, these businesses generated £26 billion of turnover in 2016 and accounted for £650 million tax revenue. The Indian diaspora, which totals about 1.5 million people, is the largest ethnic minority group in the UK. According to the IMF, India also became the third largest economy in the world (in PPP terms) surpassing Japan in 2014.
It is clear that UK is not in a bargaining position and yet any form of deal remains locked until restrictions on visa for Indian students and workers imposed by the British government are dealt with first. The current visa requires Indian students to return to their home country immediately after their education and the result is intuitive. Figures released by the Higher Education Statistics Agency (HESA) show that 16,745 Indian students registered at higher education institutions in 2016. The figures have dropped by 44% between 2011/12 and 2015/16. Even though Chancellor of the exchequer Philip Hammond says that 60% of work visas awarded in the country go to Indians, the relaxation requirement remains to be top priority for any negotiations to proceed for it is crucial for millions of middle class Indians who form the majority of these emigrants and voter base for prime minister Narendra Modi.
Postponing the issue will only cause it to hit back harder. In any given circumstance, the policy will come to haunt Theresa May for, as Home Secretary in 2010, it was she who scrapped the post-study work visa which allowed foreign students a two-year work permit in the UK after completing a course at a British university. Not only is this policy a roadblock for any further negotiations, but also a self inflicted wound for the British government. In accordance with the Commonwealth Immigrants Act of 1962, Indians coming to Britain for jobs already qualify as semi-skilled or highly skilled labourers. According to one research paper published in 2000, out of the 18,257 foreign IT professionals coming to Britain in 2000, 11,474 were from India. Restriction of skilled labour force will only hurt industries which are already experiencing an outflow of human capital. According to statistics provided by the British government, more than 100,000 EU citizens left Britain in the three months after the EU referendum. The percentage of the population that is 65 years or older has grown, increasing from 14.1% of the population to 17.8% between 1975 and 2015. The proportion of children in the UK population has declined from over 24% in 1975 to less than 20% in 2015.
Britain thinks that it can tackle India’s demand by offering some other form of diplomacy and deal. But the fact remains that there is little to offer to India due to the divergence of interests explained in the article earlier. Britain’s soft power in India is limited in scope and thus a restricting force to its capability to negotiate from a higher ground. Decreasing influence is also marked by the decreasing trade figures. India’s total trade with UK decreased by 2.2% compared to the previous year and stood at 14,022.90 million dollars in 2015-2016.
The negotiation period will be crucial for Britain and it is essential that it cracks a deal with a major country as soon as it can. With a hefty exit bill of approximately £50 billion, a trade deal with a major economic player will instil confidence amongst investors who feel that it is impossible to strike up beneficiary trade deals with multiple countries in such a short span of time. Although Britain and India have had diverged trade interests since 1947, there have also never lost sight of each other and engaged wherever possible. India’s increasing soft power stance as the world largest functioning democracy and fastest growing economy can be a big boost to Britain and in return, Theresa May’s administration can help Mr. Modi’s ambitious plans for a digital India and provide with necessary technological and financial infrastructure.
Bibliography and References
The Erosion of a Relationship by Lipton and Firn
- Tirthankar Roy. “Economic History and Modern India: Redefining the Link.” The Journal of Economic Perspectives, Vol. 16, No. 3 (Summer, 2002), pp. 109-130 (n.d.): n. pag. American Economic Association. Web.