India trade deal offering hope for UK economy that is heading towards crisis

It has been anything but a smooth ride for the Rishi Sunak led UK government, with the latest official data released this week reflecting a shrinking economy and a looming two-year-long recession.

The British Indian former finance minister, who took charge at 10 Downing Street last month with the promise to fix the fiscal errors of predecessor Liz Truss’ disastrous mini-budget, has pledged to get a grip on the soaring inflation as a priority and warned of tough tax and spending decisions ahead.

Economic experts agree on the massive scale of the challenge, even as they hold out the prospect of a free trade agreement (FTA) with India as a potential generator of much-needed economic growth.

UK economic crisis

“The economic crisis in the UK is caused by some new and some longstanding factors,” explains Dr Anna Valero, Senior Policy Fellow at the London School of Economics (LSE) Centre for Economic Performance.

“High inflation, high interest rates and tightening fiscal policy occurs against the backdrop of particularly poor productivity growth in the UK since the financial crisis which has been a drag on real wages,” she says.

“There are also large and persistent inequalities in the UK. Combined, poor growth and high inequalities have made the UK a ‘Stagnation Nation’, in urgent need of a new economic strategy to move the country onto a stronger, fairer and more sustainable growth path,” she adds.

The energy crisis triggered by the Russia-Ukraine conflict is seen as a dominating factor behind Britain’s current cost-of-living crisis of mounting household bills. A weak post-COVID recovery, hangover effect of the uncertainties of Brexit since the UK left the European Union (EU) in 2016 and years of underinvestment as a result of austerity in the aftermath of the 2008 financial crash stand out as the key ingredients behind today’s mess.

“Long before the current crisis the UK economy was suffering from too little investment, economic inequality both between and within its regions, and resulting low growth,” says Dr George Dibb, head of the Centre for Economic Justice at London-based think tank Institute for Public Policy Research (IPPR).

“This was compounded by the recent decade of ‘austerity’, which meant cuts that hit ordinary families and degraded the education and health services that are the building block of any flourishing economy.

“Things were made worse again by the huge impact on energy prices of Russia’s invasion of Ukraine, with the resulting cost of living crisis that has provoked; and the final straw that broke the camel’s back was the Truss government’s recent mini-budget and its proposed unfunded tax cuts, which undermined market confidence in both the UK government and the economy,” he reflects.

In his view, the constant churn of new prime ministers and governments with regularly changing agendas has made business decision-making even more challenging and the need of the hour is a period of stability with a plan that will deliver on the growth agenda as the Sunak government prepares to table the crucial Autumn Budget Statement next week.

Scraping tax allowances

“There are reports that the government is planning to scrap the dividend tax allowance, but that would be only a small step in the right direction, and we think it should go further and start taxing dividends at the same rate as income tax. Not only would this raise billions more to help support households and businesses, it would also end the injustice that working people pay a higher tax on their income than shareholders,” adds Dr Dibb.

The City of London Corporation, which makes up the financial heart of the UK capital, also urged the government to focus on boosting growth and investment.

“Levelling up must include all parts of the UK – including London – as the capital’s success benefits every corner of the country,” says Policy Chair Chris Howard.

The National Institute of Economic and Social Research (NIESR), Britain’s independent economic research institute, also calls for a focus on such an equitable growth agenda in the wake of the Russia-Ukraine conflict induced “terms of trade” shock where the cost of imports – food and energy in particular – has risen sharply relative to the value of exports.

“The Prime Minister needs to focus on enabling poorer households to cope with these shocks, while at the same time ensuring that there is a clear plan for stabilising the public finances in the medium term,” says Hailey Low, NIESR Associate Economist.

How will India-UK deal help the economy that is heading towards crisis?

Asked how an India-UK FTA might impact this scenario, the analysts welcomed the fact that Sunak was committed to an agreement.

“Such a deal could generate growth opportunities for the UK, particularly if there is potential to export services – the UK’s key area of comparative advantage – to a market that is expected to grow significantly over time,” Dr Anna Valero notes.

Hailey Low, also views an India-UK FTA with positivity as the ongoing negotiations run into the new year. As the fifth largest economy in the world, India is situated at the heart of the Indo-Pacific region which adds to the attractiveness of such a free trade pact.

“The FTA with India will lead to increased exports, strengthen the UK trade position, and diversify trade routes, making supply chains more resilient and less vulnerable to political developments. In a bid to revive the UK’s manufacturing industry, it will give the UK accessibility to cheaper raw materials for manufacturing outside of the EU,” notes Low.