House of Commons - Trade and Industry

Select Committee on Trade and Industry Third Report

2 The UK's poor trade and investment record with India

18. India's trade and investment with the UK should be at a higher level than with its main competitors, given that "the UK has always enjoyed a special trading relationship with India".[11] As a proportion of total UK-World goods trade, both UK exports to, and imports from, India increased between 1992 and 2005—from 0.9 percent to 1.3 percent for exports, and from 0.7 percent to one percentage point for imports.[12] The UK balance of trade in goods with India has fluctuated between deficit and surplus in the recent past, but was at a deficit of £47 million in 2005.[13] Exports of goods to India were valued at just over £2.8 billion, making India the 16^th largest export market for UK goods that year. Imports of goods into the UK were valued at just under £2.8 billion, making India the 22^nd largest source of UK imports.[14]

19. The trade in services with India has been at a lower level than the trade in goods. India ranked 22^nd as a destination for exports of UK services (£800 million and 0.8% of all UK service exports) and 19^th as a source for UK services imports (£1 billion and 1.3% of all UK service imports) in 2004.[15] The balance of services trade has been in deficit since 1998, having gone from a surplus of £57 million in 1992 to a deficit of £203 million in 2004.[16] This suggests the UK is becoming a more important market for Indian services, as highlighted by the recent increase in offshoring of business process outsourcing (BPO) by UK companies.[17]

20. The services deficit, combined with a slight deficit on goods trade, has brought about a deterioration in the balance of trade with India, which has gone from a £186 million surplus in 1992 to a deficit of £242 million in 2004, although 2003 saw a £110 million surplus.[18]

21. From an Indian perspective, the evidence suggests that the UK is also an important trading partner for India. In 2004/05 the UK was India's fourth largest goods trade partner (4% of India's World trade in goods), after the US (11%), China (6%) and Belgium (4%).[19] India's main trading partners, broken down by exports and imports, were:

— Exports—US (17%); China (6%); Singapore (5%); Hong Kong (5%); the UK (4.5%); and

— Imports—China (6%); US (6%); Switzerland (5%); Belgium (4%); Germany (4%); Australia (3%); and the UK (3%).[20]

22. Major goods items traded between the UK and India have come from "the traditional manufacturing sector such as textiles, apparels, crude materials and various manufactured articles".[21] These have included:

— Exports to India—pearls, precious and semi precious stones; machinery and transport equipment; metal scrap and other crude materials; and other manufacturing;[22] and

— Imports from India—textiles and readymade garments; gems and jewellery; footwear; electrical machinery and transport equipment; metal manufactures; power generating equipment; organic chemicals; and vegetables and fruit.[23]

23. The main services traded between the UK and India have included:

— Services exports to India—financial/business services; royalties and licence fees; transportation and travel; insurance; communications; construction; and

— Services imports from India—transportation and travel; IT and other information services; and other business services.[24]

24. Trade between the UK and India is expected to continue to grow in the future.[25] UKTI told us that the trade figures between India and the UK show promising and continuing signs of growth, with this year's export figures showing a 27.2% increase over the same period last year.[26] Sectors in which the growth in trade are currently most pronounced include:[27]

Imports into the UK from India

— Medicinal and pharmaceutical products: This category first appeared in the 'top ten' items exported to the UK in 2003. In the first three quarters of 2005, exports reached £67 million, suggesting an average growth rate of around 50 percent per annum over the last two years.

— Apparels: As a result of the abolition of the quota system under the Multi-Fibre Agreement (MFA) imports of apparels have risen to £519 million, again suggesting an average growth rate of around 50 percent per annum over the last two years.

Exports from the UK into India

— Pearls, precious and semi-precious stones: The UK does not have a large domestic precious/semi-precious stones industry. Most exports are thought to have been imported from Belgium and other countries for re-export to India.[28]

— Metal scrap: This is another category which does not reflect the traditional UK economy.

25. 'Metal scrap' and 'pearls, precious and semi-precious stones' make up almost two-thirds of UK exports to India, indicating "a trade basket where the UK does not have a competitive advantage over other nations".[29]

26. We were concerned that the growth in India-UK trade had been slower than the overall growth in Indian-EU trade. India's exports to the UK have grown at a compound annual growth rate (CAGR) of 12 percent per annum compared to a CAGR for Indian exports to the EU as a whole of 13 percent. Of far more concern is that UK exports to India are growing at a CAGR of just two percent per annum compared to a CAGR of 14 percent for the EU.[30]

27. India is an important trading partner for the UK, and increasingly so. However, we are concerned that UK exports have been overstated and that the real balance of trade deficit is much larger than has been reported. These statistics appear to be showing the re-export of imported goods and the export of goods in sectors in which the UK does not have a comparative advantage over its competitors. These are unsustainable in the long run.

28. As India develops, Indian companies are taking advantage of the opportunities for trade with the UK. UK exports to India, however, are not increasing at the same rate as those of our main competitors, suggesting to us that UK companies are not taking advantage of the trade opportunities an increasingly open Indian economy is providing.

Foreign Direct Investment (FDI)

29. As the Chinese economy has become saturated by Foreign Direct Investment (FDI)[31] India is being increasingly viewed as a priority destination for FDI.[32] A recent survey of the World's leading companies' executives' confidence in, and preferences for, FDI found that while for a third year running, China remained the top ranked country,[33] India was ranked second in 2005 (moving the US into third place) rising from third in 2004 and sixth in 2003. FDI into India has been estimated to have averaged around £250 million per annum prior to the regulatory reforms of the mid-1990s, but has increased year on year since then until, in 2004, FDI into India amounted to just over £3 billion.[34] UKTI told us that this suggested that: "the Indian reform programme is beginning to be recognised on a wider scale" and that: "India still lags behind China in World FDI, but is gaining on it".[35]

30. In 2004, net FDI by UK companies in Indian subsidiary and associate companies amounted to just over £269 million. This was one half of one percentage point of all net direct investment by UK companies overseas and a rise of £80 million (39%) on the 2003 total.[36] Our witnesses were worried that although the statistics suggested the UK was doing reasonably well in isolation, compared to other countries the situation was relatively poor, especially given the UK's historical links with India.[37] The UK was only the fourth largest provider of FDI into India in 2003/04 (11% of total FDI by overseas companies in India) after Mauritius (26%), the US (20%) and the Netherlands (13%).[38] Provisional data for 2004/05 suggests that the UK may be further losing ground, having fallen to sixth in the ranking of investors in India, now behind Germany and Japan.[39]

31. However, the official statistics are incomplete and do not report the whole story. The Commonwealth Business Council (CBC) and UKTI told us that UK companies are investing in India through Mauritius because of its economic relationship with India, which allowed investors special tax breaks.[40] They also told us that India does not include the reinvestment of retained earnings by overseas companies back into their local companies in its official statistics.[41] Many UK companies have had investments in India for many years, so that the re-investment of profits may be considerable over time.

32. According to UKTI, by far the most dramatic new trend in the UK-India business relationship has been the recent growth of Indian companies as investors into the UK, as India's restrictions on investing overseas have been reduced.[42] Gross outward FDI from India into the UK by Indian companies or their subsidiaries has risen from an average £14 million per annum before 1995 to £1.3 billion in 2004; 2004 was the first year gross FDI in the UK by Indian companies exceeded outward FDI.[43] These interests range from IT enabled services, for example HCL's call centres in Belfast and the joint venture between Pearl Group Ltd and TCS—Diligenta—in Peterborough, through to pharmaceuticals and other manufacturing.

33. However, not all of the benefits of this investment have accrued to the UK economy. Net inward FDI by Indian companies and subsidiaries into the UK has been estimated to have amounted to around -£18 million in 2004, suggesting that Indian companies have tended to repatriate their profits back to India rather than re-investing them in the UK.[44]

34. We are concerned that the UK is falling behind its main competitors when it comes to investing in India. Flows of FDI between the two countries have been increasing, but while Indian companies appear to be taking advantage of the increased opportunities to invest in the UK, UK FDI in India, although substantial, is not increasing commensurately.

35. However, there is evidence to suggest that UK companies' investments in India may have been underestimated due to reporting technicalities. Profits of UK companies which have invested in India in the past do not appear in the official statistics. There is also evidence to suggest that UK companies are investing in India through third countries—mainly Mauritius—because of the tax advantages. We recommend that the UK Government tries to collate these figures, so that a more accurate picture can be obtained.

11 Appendix 11, para 1.1 Back

12 ONS, Pink Book, 2005, table 9.4 and ONS, Monthly Review of External Trade Statistics, table G1, February 2006 Back

13 ONS, Monthly Review of External Trade Statistics, table G1, February 2006 Back

14 Ibid. Back

15 ONS, Pink Book, 2005, table 9.5 and Appendix 11, para 1.2 Back

16 ONS, Pink Book,2005, table 9.5 Back

17 Appendix 18, page 3 Back

18 ONS, Pink Book, 2005, table 9.3 Back

19 FCO website (14 June 2006): www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1007029394365&a=KCountryProfile&aid=1018965323192. Back

20 FCO website (14 June 2006): www.fco.gov.uk/servlet/Front?pagename=OpenMarket/Xcelerate/ShowPage&c=Page&cid=1007029394365&a=KCountryProfile&aid=1018965323192. Back

21 Appendix 11, para 1.1 Back

22 Ibid, page 4, table 1B Back