India should be a good strategic trade partner for the UK. With an economic growth faster then China – set to top seven per cent this year, a rapidly improving business environment and a large Indian-born population resident in the UK, it seems the perfect target market for UK companies.
Except that it is not.
The UK sends a marginal – and declining – part of its merchandise exports to India, and imports from India form a negligible share. China, in contrast, has a larger and rising importance as an export market and is now the UK’s second largest supplier of goods after Germany.
The UK was very important for India in the early decades after independence in 1947, trade with the UK accounting for about one third of all Indian merchandise exports and imports. But that reliance has long gone, and now India trades mostly with other Asian countries and with the US.
UK merchandise exports to India are now composed more of commodities, particularly oil and gold, than was the case twenty years ago. Machinery forms a smaller proportion.
Over the same period, Indian exports to the UK also changed composition, with an increased share of motor vehicles, engines, medicaments and aircraft, while the importance of textiles exports have shrank. In 1995 the top eight India products exported to the UK were all related to clothing and textiles, including men’s clothing, cotton fabrics and textile yarn. Last year, cars and medicaments were among the top five exported products.
The poor merchandise trade performance is not due to the two countries trading mainly in services. UK services imports from India are low and declining, just about 2 per cent of the total. Last year the UK imported over ten times more services from the US than it did from India. In contrast UK imports of services from other Asian countries, including Hong Kong, Singapore and Thailand, are rising. Last year India accounted for only 13 per cent of all services imports to the UK from Asia, down from 22 per cent in 2010.
The story is not much different in terms of investments.
While the UK was a the
third largest equity investor in India in the last 15 years, its role has been declining and it moved down to the sixth position in the fiscal year ending March 2015.
Merger and acquisition deals – a large part of all foreign direct investments – have been rising between the two countries, but not forming a recognisable trend. UK acquisition deals into India accounted for only 7 per cent of total foreign acquisitions of UK companies in 2014, and the proportion shrank further in the first ten months of this year.
The main target by far of UK companies in India is the telecoms sector, possibly the result of UK companies using contracted telecom services from India, followed by oil & gas and consumer industries.
But if UK and Indian relationships are weak in terms of trade and investments, they are strong in almost any other respect.
In the 2011
UK Census, India was the most common country of birth of non-UK born residents, replacing Ireland for the first time since at least 1951. According to the latest ONS estimates there are about 800,000 residents of the UK that were born in India, about 9.6 per cent of the total non-UK born resident population. The Indian-born population is the largest non-UK born group in London, the North, South East and the West Midlands.
Indian representation is even higher in the medical professions. About 9 per cent of all doctors practicing in the UK gained their medical qualification in India, the largest share of those from outside the UK.
India provides the second largest group of international students after China, with about 20,000 students in higher education in the academic year 2013-2014, about 6 per cent of all non-EU international students. However, the number shrank from nearly 40,000 in the last decade, in contrast with the rise in the number of Chinese students.
Indian tourism is also important for the UK. Indian tourists spent nearly 10 million nights in the UK last year, the ninth largest by any country. Both the number of visits and the nights spent in the UK by Indian visitors have almost doubled since 2003.
India is still a poor country, its GDP per capita is less than half that of China and below that of the Philippines. Its institutions are less business-friendly than in other Asian countries – it ranks 130th in the World Bank’s ‘Ease of doing business’ rankings, below China in the 84th position, although above the regional average.
However, Indian economic growth is strong and is expected to accelerate next year compared to slowing growth in China. Data from the World Bank and the World Economic Forum show that the business environment is improving, with easier access to electricity, quicker and cheaper procedures to start a business, and better government institutions. Poverty is declining rapidly and the middle-income population is forecast to reach a quarter of the total by 2021 according to calculations from Brookings and the OECD, up from just over one per cent in 2000.
The business potential from a stronger economic relationship between the two countries seems huge.
