Is India close to a free trade agreement with the U.K.?

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

SoftBank-backed Ola Electric is set to raise nearly three quarters of a billion dollars with a stock market listing. Adani Energy Solution is going ahead with a $1 billion share sale. Medication maker Mankind Pharma is locked in a $1.6 billion deal to buy the Covid-19 vaccine developer Bharat Serums & Vaccines.

These transactions, announced over the past seven days or so, capture only a fraction of the true scale of dealmaking among Indian corporates. But the mood appears to be shared among Indian politicians, too.

India and four European nations — Iceland, Liechtenstein, Norway and Switzerland — struck a free trade agreement (FTA) earlier this year. And now a deal with the U.K. appears to be on the horizon.

David Lammy, the U.K.’s new foreign minister, visited New Delhi only weeks into his tenure. “Our Free Trade Agreement negotiations is the floor not the ceiling of our ambitions to unlock our shared potential and deliver growth, from Bengaluru to Birmingham,” Lammy said last week before his visit.

How close is an agreement?

Both countries are sufficiently motivated and see each other benefiting from a deal. For the U.K., a free trade agreement with India would be the “most significant” deal since the Brexit vote, according to Chietigj Bajpaee, senior research fellow for South Asia at the thinktank Chatham House.

The deal would also be a big win for India, as it would see a rush of investment into the country that could translate into thousands of jobs — a key priority for Indian Prime Minister Narendra Modi’s third administration.

“Both countries could see significant economic gains from a comprehensive agreement,” said Aastha Gudwani, Bank of America’s India economist.

The U.K. has signed trade deals with Singapore and Japan, two countries with which India has long had Comprehensive Economic Partnership Agreements (CEPA) with. India and the U.K. also have high rankings on the World Bank’s Trade Complementarity Index, which indicates whether countries are natural trade partners.

Even politically, both countries now have a fresh mandate to strike deals. “The need to now deliver on the ground is very high [on] both sides,” Keshav Murugesh, chief executive of the NYSE-listed business process outsourcing firm WNS, told CNBC’s Inside India.

India’s demands

A key demand for India has been a simplification of the U.K.’s business and temporary visas for professionals. Such a program would benefit companies in India’s prominent IT and BPO sectors, including companies such as WNS, which employs more than 60,000 people worldwide.

In the past, it’s been a challenge for the U.K. government to convince its electorate that enabling overseas workers to travel to the U.K. to do business would benefit economic growth. However, the new Labour government appears to be more relaxed.

Murugesh explains that companies such as his — that already employ hundreds of people in the U.K. — need to occasionally bring in experts in specific sectors to win new business. These professionals are often required to visit the U.K. to understand potential client’s needs and are expected to travel back to India to produce a solution.

“It is not that these people coming in are potential immigrants,” Murugesh added. “These are people actually who are here to deliver a global project which is going to benefit a global company based out of the U.K. or wherever else, on a significant scale.”

India is also keen on gaining an exemption from the U.K.’s Carbon Border Adjustment Mechanism. CBAM is a tax on carbon-intensive products and penalizes goods made in countries that are not putting sufficient effort into decarbonization.

“India’s argument is that the imposition of the carbon tax could take away much of the concessions agreed upon in the FTA,” said BofA’s Gudwani in a research note to clients.

However, a similar levy for goods sold into the European Union takes effect in 2026 — and any loopholes the U.K. creates would risk the country losing out on a better trading arrangement with the EU — the U.K.’s largest trading partner.

The UK’s demands

Since India (quietly) terminated bilateral investment treaties with more than 50 countries in 2017, none currently exists between the U.K. and India. These agreements have historically safeguarded investors and companies that invest in India.

Several disputes between the Indian government and U.K. companies such as Vodafone, and Cairn Energy which sued to seize Air India’s aircraft to enforce a $1.2 billion arbitration award, mean that the U.K. is unlikely to agree to any deal without investor protection.

“In light of the number of ongoing disputes between the Indian government and the UK companies, involving the issue of investment protection, both sides are likely to negotiate a strong investment protection agreement to address their own concerns,” Gudwani added.

Infosys handed $4 billion tax demand. India’s second-largest IT services firm has received a tax demand for about $4 billion over services received from its overseas branches. Infosys said in a statement that it believed the tax “is not applicable” to the dealings identified by the government.

Modi’s BJP is debating whether India needs Chinese investments. An “internal battle” is happening within India’s ruling Bharatiya Janata Party over inviting Chinese investments, Alicia Garcia-Herrero, chief Asia Pacific economist, told CNBC. While India’s chief economic advisor proposed promoting foreign direct investments from China as a better option than increasing trade activity between the two countries, India’s trade minister shot down the idea, saying there was “no rethinking at present.”

Can you travel without a tipple? India is among the top 10 destinations for those looking to cut back on alcohol while on vacation. The ranking, however, isn’t a list of countries where alcohol sales are banned —  places like Brunei, Saudi Arabia and Iran. Rather, countries are evaluated on nine metrics — from the cost of domestic beer to average alcohol consumption by residents.

Indian stocks closed at an all time high again. The Nifty 50 index closed above 25,000 points for the first time. The index has risen 15.09% this year, outperforming the S&P 500, which is up 14.87%.

The benchmark 10-year Indian government bond yield has ticked lower to 6.91%, falling to lows last seen in April 2022.

On CNBC TV this week, Erez Israeli, chief executive of generic drug maker Dr Reddy’s Laboratories, said that over the next decade, about 90% of the drugs facing the “patent cliff” — where patent protection expires — will be in the biologics space. “We’re absolutely planning to play in the biosimilar business,” Israeli added. Dr Reddy’s is also a U.S.-listed company.

Meanwhile, Pieter Elbers, CEO of India’s largest airline IndiGo, spoke to CNBC’s “Street Signs Asia” about the airline’s decision to allow women to choose not to sit next to men on flights.

Akums Drugs & Pharmaceuticals and infrastructure construction firm Ceigall India debut on the stock market next week.

August 4: Australia interest rate decision

August 5: India services PMI, euro zone composite PMI, U.S. composite PMI

August 8: India interest rate decision