UK-India Bhai Bhai?
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In this week’s newsletter, we’ll learn about:
The curious UK-India FTA (Free Trade Agreement).
How Value at Risk (VaR) helps portfolio decisions?
Market Kya Keh Raha Hai Sir?
After 14+ rounds of negotiations, 3 years of back-and-forth, and the fallout from Brexit, the UK has finally secured a Free Trade Agreement (FTA) with India.
But why did it take so long? The UK, having left the EU, desperately needed new trade partners.
This week, we unpack the story of how an uncertain UK and an eager India approached this deal. We also explore the hidden agenda that fast-tracked it.
Let’s dive in!
A Post-Brexit UK
In 2020, the UK officially left the European Union (EU), a move known as Brexit. The goal was to regain control over trade and immigration policies.
After leaving, the UK had to find new partners to maintain its economic strength. While it renewed over 70 trade deals, this didn’t offer the global advantage it hoped for.
To get a real edge, the UK started focusing on bilateral free trade agreements (FTAs), aiming to reduce tariffs & quotas and boost trade.
However, a problem arose. The Conservative Party-led government, the one that pushed for Brexit, lost the public’s trust. It could only manage two bilateral FTAs while in power, with Australia and New Zealand.
New Labour
In 2024, the Labour Party, led by Sir Keir Starmer, won the election, backed by widespread economic dissatisfaction. He saw focusing on trade as a means to revive the economy and create jobs. For this, India was a key part of Labour’s post-Brexit trade strategy.
Current India-UK Trade Status
India is currently the UK’s 11th largest trade partner, while the UK is India’s 16th. Trade between the two is valued at £42.6 billion with a steady growth of 12.21% over the last 10 years.
However, it’s still relatively small compared to other global partnerships.
The UK mainly exports metals to India, while India exports textiles, clothing, and medicines. Services, like travel and business services, play a significant role.
Further, India has a trade surplus. Its exports are around £25.5 billion, while the imports total £17.1 billion (as of 2024).
For two of the world’s largest economies, this trade relationship still has plenty of room to grow.
A look inside the India-UK FTA
This new FTA marks the third bilateral FTA the UK has signed post-Brexit and the first under the Labour government.
How does the UK benefit?
The UK stands to gain significantly from this FTA.
India has agreed to reduce tariffs on 90% of UK goods, such as medical devices, aerospace parts, and luxury cars. British exporters could save up to £400 million annually by 2035.
UK service providers can also now offer their services in India without needing a local presence, especially in infrastructure, IT, and public services.
How does India benefit?
The FTA brings significant short-term and long-term benefits for India.
Short-Term Win: Jobs & People
Small and large Indian companies, especially in labour-intensive sectors like textiles, leather, and gems & jewellery, will see increased demand. This will lead to job creation in these industries.
For sectors like IT, benefits to Indian companies and employees are expected to exceed ₹4000 Cr. This is because of the ‘Double Contribution Convention’, which is an agreement announced alongside the FTA.
Here, Indian workers in the UK will no longer need to pay social security contributions in both countries. For UK companies, this would make Indian workers around 20% cheaper to hire, benefiting around 60,000 IT professionals!
Long-Term Win: Trade & Tariffs
India will gain duty-free access to the UK for 99% of its exports, including textiles, pharmaceuticals, and engineering goods.
Tariff cuts also apply to sectors like agriculture. Indian products like tea, spices, and ready-to-eat foods will have an easier time entering the UK market, helping Indian brands establish a global presence.
Addressing Sensitive Concerns
While the FTA brings many benefits, it’s not without challenges.
Some industries, like alcohol and car manufacturing in India, may face competition due to reduced tariffs on goods like Scotch whisky and luxury cars.
However, phased tariff cuts and strict quotas will allow Indian businesses to adjust.
The Labour-led UK’s focus on climate change presents another challenge.
Climate Change and the FTA
Under the new Labour government, the UK is prioritising climate action, which includes the introduction of a Carbon Border Adjustment Mechanism (CBAM) starting in 2027.
This policy will impose a carbon price on imports of carbon-intensive goods, like steel and cement (CBAM covered in detail before).
The problem for India is that its industries may not meet these new emissions standards. They could face penalties, adding costs for Indian exporters.
While both countries benefit from the FTA, India may face difficulties here, which could complicate the trade relationship in the future.
India’s Broader Trade Strategy
India isn’t just focused on the UK but the entire European continent. In March 2024, it signed a trade deal (EFTA), which includes Switzerland, Norway, and Iceland.
Additionally, India is working on an FTA with the EU that is expected to be finalised by 2025. This is part of India’s broader strategy to strengthen its trade relations globally and diversify away from over-reliance on countries like the US and China.
The De-risking Agenda
Despite differences, both India and the UK see this FTA as a way to deepen trade ties for mutual stability. Both see deeper integration through the FTA as a way to hedge against geopolitical risks and economic uncertainties.
The backdrop includes global tensions, ongoing wars, an assertive China, and the possibility of a more transactional US under Trump 2.0.
In conclusion, this FTA is a significant milestone, but it’s only one piece of a larger, ongoing effort to forge deeper, more resilient trade ties in a rapidly changing world.
On how beneficial this deal would actually be, only time will tell. But this is a step in the right direction.
So, do you think this is a good deal? Tell me in the comments!
Dalal Street Dictionary
Imagine your exam result has just come out. Your friend calls you to say that they barely passed by 5 marks. You’re curious to know yours, but your result will come tomorrow.
So you do a mental calculation based on your past exam performance. In the possible worst-case scenario, you’ll at least pass by 20 marks.
Investment portfolio managers use a similar calculation called Value at Risk (VaR). It helps determine the minimum amount the portfolio could lose in the worst-case scenario.
This loss can be measured daily, weekly, or monthly. VaR also shows the confidence level in this worst-case scenario.
To calculate historical VaR at, say, a 95% confidence level, the manager gathers the stock's past returns (e.g., daily for a year). They later sort them in descending order and then pick the return at the lowest 5%. That is the approximate historical 95% VaR.
But, how is this useful in markets?
To understand the use of VaR better, let’s take an example.
Suppose you have a portfolio worth ₹1 lakh and want to invest in riskier assets. Say, assets ABC & XYZ. Both are risky, and both give similar returns.
Before investing, your portfolio’s VaR comes to:
5% Daily VaR of ₹500.
This means, each day, there is a 5% chance that you’ll lose money, and the loss would be at a minimum of ₹500.
If you add risky asset ABC, the portfolio VaR increases to ₹700, while XYZ increases to ₹900. For similar returns, here, based on VaR, ABC is the better addition, as its minimum losses in the worst-case scenario are lower.
In conclusion, VaR helps investors compare how different investments affect the potential minimum worst-case losses of their portfolio.
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Urban Company’s modest IPO.
Why is India in love with matcha?
Jio’s plans for influencer marketing!
Recommendations
I recommend watching the Berkshire Hathaway 2025 Annual Meeting this week. It is the last meeting in which the unstoppable Warren Buffett will serve as CEO.
A must-watch for anyone curious about the Berkshire legacy, Warren Buffett’s sharp reflections, and the future of one of the world’s most iconic companies.
Thanks for reading this weekend’s newsletter. I’d like to know your thoughts, so please feel free to comment below. Your feedback helps us improve!
And don’t forget to like, share, and restack!
This is Parth Verma,
Signing off.
Another great newsletter, If we talk about FTA between India and UK, it open's a more diversified export portfolio for India. FTA is a good deal for India as to curb the overall dependence on US, China amid Tariff wars. The expansion in Europe will benefit the emerging nation like India. Thanks for sharing this Insightful newsletter. Always worth waiting and keeping this in my wisdom vault. All thanks to Parth Sir and his wonderful team behind this knowledgable content.
Very informative