Select Committee on Foreign Affairs Written Evidence

Written evidence submitted by UK Trade and Investment


  In 2005 "India continued its inexorable rise, and the world took notice."[2]

  2005 also saw India's economic indices soar. Indian stock markets have recorded 100% growth in 18 months and Indian FOREX Reserves reached an all time high ($145 billion—about three times the reserves of the Bank of England). 2005-06 growth will be above 7% illustrating the steady rise of this emerging giant economy.

  But India's enormous burden of poverty continues (300 million people on less than $1 a day; 350 million illiterate; more than 40% of all children undernourished). The quality of life is improving in rural India, helped last year by a good monsoon. The government remains committed to poverty reduction however, especially improved education and health services.

  In addition to tax reform, progress has been made on civil aviation, telecoms, and some of the transport infrastructure. Fiscal deficits are coming down. But a lot of the reform that the UK is keen to see—financial sector liberalisation, foreign investment in retail, implementation of the power sector reforms—have not progressed at a great pace. Democratic realities, in part, constrain the nature and pace of change in India. The post 1991 liberalisation approach has gone some way to meet the challenge of globalisation but market access and reform remain at the top of the UK's trade and investment interest in India.

  India remains eighth in our league table for inward investment and more British companies are finding business partnerships with India.

  One key focus for the UK will be on the knowledge economy, S&T cooperation and education links. India's future is its young people (54% under 25).

  The UKTI's team in India is one of HMG's biggest overseas operations. As part of UKTI's new strategy for emerging markets, more resources will be allocated to India, including an emphasis on financial markets.


  HMG places extremely high importance on our relationship with India, with trade and investment being driven at the most senior levels. India is the world's second fastest-growing major economy and an emerging global economic force. In the next 10 years it is expected to overtake China as the fastest growing major economy on a sustained basis. Within 40 years it could be the world's third largest economy.

  UKTI is committed to making UK plc part of this success. India is already the UK's second largest export market in Asia Pacific, and the third largest investor in the UK in terms of the number of projects.


  The trade figures between India and the UK show continuing signs of growth with 2005's export of goods showing a 25.4% increase on 2004. However, only 1% of the UK's total trade is with India and UKTI is playing its part to increase this.

  Among the UK's top six export sectors to India, sales of non-road transport equipment has risen by 68% from £88 million in 2001 to £147 million in 2005; of general industrial machinery by 83% from £54 million to £98 million in the same period; and of specialised industrial machinery by 92% from £48 million to £93 million. In all three cases this is faster than the rate of growth of total UK exports to India of 58% over the four years.

  Some trade, such as sales of rough and un-worked diamonds, shows the UK's strengths as a market and transport hub; it also reflects Indian strengths, in this case in the cutting of small gemstones. In global terms, the UK enjoys a strong position in the diamond trading market.

  As of 2005, the UK remains the second largest European Union supplier of goods to India: after Belgium if diamonds are included, and after Germany if they are excluded.

  Analysis of our imports from India also signals the openness of the UK economy and recognition of the benefits of globalisation for UK consumers. UK Company success in India can be found in almost every sector, from architecture to pharmaceuticals, to franchised UK retail operations. Joint ventures exist in aerospace, automotive components, energy (oil, gas and bio-diesel) and nanotechnology.

  The Committee should note that the Government is engaged in regular dialogue with the Government of India to recognise the benefits of removing barriers to foreign participation in important sectors. We continue to lobby the Government of India for increased liberalisation in those sectors where the UK leads the world, such as retail, financial, legal and business services, both bilaterally through the annual ministerial meeting under the Joint Economic Trade Committee process.

  A new trend in the UK-India business relationship is the growth of India as in investor into the UK. A very significant level of new investments are UKTI assisted. UKTI's Inward Investment efforts in India aim to improve the competitiveness and economic prosperity of the UK by identifying, actively encouraging and facilitating high quality Indian inward investment into the UK, focusing particularly on "knowledge driven" industry sectors including: ICT (Software services, IT enabled services, telecom software); Biotech, Pharmaceuticals & Healthcare; Automotive/Advanced Engineering; Creative Industries; Food and Drink Processing.

  It is important to recognise however, that the UK has also been investing in India and that some of this investment has taken place over a long period of time. Many UK businesses are long established in India and their reinvestment levels are significant. The new, and growing, UK investment in India will increase as India liberalises further.

  The Indian net Foreign Direct Investment position in the UK was estimated to be £186 million at the end of 2004, compared with a UK net FDI position of £1,674 million in India. This latter figure has more than tripled from £532 million at the end of 1996. Some of the figures are sourced from the Indian Government. Unremitted profits are included in the net foreign direct investment flows published by the Office for National Statistics.[3]


  Although there is a strong and extensive public sector in India, India is essentially a free market economy underpinned by the common law system. English is the language used by the courts, and by big business. Most areas of the Indian economy are open to foreign direct investment, albeit with certain restrictions in some cases. The two main non-defence sectors still closed to FDI are legal services and retail. There is some prospect of the retail sector being opened and we are working in support of liberalisation of the legal services market as well.

  There are many established links between Indian and British business and considerable respect for UK capability in different areas of business and education. In this respect, British business comes to India with a head start on other countries.

  At the same time, geographical distance from the UK, extensive bureaucracy and continuing problems with corruption make India a challenging market, especially for relatively inexperienced exporters. UKTI has an important role to play in assisting UK companies to achieve business success in this market.


  There are a number of issues affecting UK companies seeking to do business in India that have required extensive lobbying from UKTI's Team India. They are real and current illustrations of the barriers to trade and investment faced by UK Companies when seeking to do business in India. These barriers include caps on foreign ownership (eg 26% in insurance sector), double taxation, heavy import duties eg on Scotch Whisky, protracted legal cases, petty and more systemic corruption, bureaucracy and non-payment.


E1.  UKTI in India

  With representation in nine cities, India is UKTI's second largest overseas network.[4]

  As part of the new strategy, UKTI has restructured. There is no longer a division between investment and trade. The new "Business Directorate" is adopting an approach that develops relationships with UK and foreign companies on a sectoral basis. This unified approach is also being reflected in our diplomatic posts in India where the trade and investment teams have merged. UKTI will continue to emphasise the proactive search for inward investment leads aimed at companies that have the potential to add the highest value to the UK economy.

  As part of UKTI's new strategic focus on emerging markets, India is a high priority and the team will be strengthened as resources are released from other markets. We aim to deliver more by focussing on high value/high impact work and by outsourcing work that can be delivered as effectively by others. The Budget of 2006 formalised UKTI's mandate to make representations on behalf of large UK corporates for major business propositions. This approach will also include a project to engage with established businesses to help them to develop a strategy for emerging markets, including India.

E2.  UKTI International Group (INT)

  Key Mechanisms:

    —  Joint Economic Trade Committee.

    —  Indo-British Partnership Network.


  JETCO was established in 2005 as part of the UK-India Prime Ministers' Initiative to strengthen bilateral relations. This ministerially-led committee meets annually in order to discuss specific issues arising out of our economic co-operation and to identify opportunities to enhance bilateral trade and investment in traditional and non-traditional areas. UKTI acts as the Secretariat to the JETCO on the UK side, and is responsible for acting on the Committee's agreed recommendations. Ministers and officials maintain regular dialogue on issues of concern to business.

  The second full JETCO meeting took place in London on 31 January 2006, with the third due to take place in Delhi on 16 January 2007.

E2.2  Indo-British Partnership Network (IBPN)

  The IBPN is a business led organisation, which aims to encourage and support UK businesses, particularly SMEs, to do business in India. The IBPN also aims to identify issues that prevent or discourage UK firms from trading with India. It is managed by a board drawn from the private sector. Membership of the Network is open to British and Indian companies of all sizes. There are currently approximately 200 individual members of the IBPN.

  The original Indo-British Partnership was launched by the then British and Indian Prime Ministers, John Major and Narasimha Rao, in 1993. In subsequent years the work of the IBP fell away primarily because the expected benefits to British companies following the initial liberalisation of the Indian economy were not being realised.

  In 2002, Tony Blair and Atal Bihari Vajpayee (the then Indian Prime Minister) renewed the commitment to strengthen the bilateral relationship through the New Delhi Declaration, which was signed in Delhi in January 2002. Lord Karan Bilimoria, the CEO of Cobra Beer, was appointed the UK Co-Chair of the IBP in 2002. With the support of UKTI he has created a new business led organization, the Indo British Partnership Network (IBPN). UKTI have provided start up costs, primarily to fund the board secretariat.

  The IBPN Board of Directors has played an increasingly valuable role as the voice of business in relation to India and directly in the JETCO process. The Board is developing a business plan, which will enable the IBPN to increase their membership and business activity. The role and scope of the IBPN will be driven by its private sector membership.

E3.  UKTI Business Group (BG)

  The development of India's service sector, including the business process outsourcing industry, IT solutions providers, creative industries and software research, have attracted international attention. However, modernisation and upgrading is taking place across a much broader range of areas, including the automotive sector, other areas of engineering, chemicals and heavy industry. India is a priority market for all BG sectors. Some of our sector teams operate regionally eg automotive is based in the West Midlands. The British High Commissions and British Trade Offices also have sector specialists.

  India is a priority market for UK Trade & Investment's inward investment activity. The team in India is supported from UKTI in London, handling issues such as research and client delivery. UKTI's inward investment team work in close partnership with the UK Development Agencies under the guidelines laid down by the Committee for Overseas Promotion, which is the forum under which the UK inward investment effort is managed. The development agencies that have offices in India are Scottish Development International (New Delhi), Welsh Development Agency (Bangalore) and British Midlands (a collaborative operation between Advantage West Midlands and the East Midlands Development Agency in Mumbai). The City of London and Think London are also considering opening offices in India.

  India is an important source of inward investment into the UK which currently receives approximately 60% of all Indian investment coming into Europe. India is now the third largest source of foreign direct investment (after the USA and Japan). Indian investment is spread across the UK although a large proportion goes to London (37% of all new projects over the last five years).

  There are over 500 Indian companies with a base in the UK of which approximately two thirds are in the ICT/software sector. 23 Indian companies are listed on the London Stock Exchange with a total market capitalisation of US$3.46 billion (£1.98 billion). More Indian companies are listed on the London Stock Exchange than on the New York and NASDAQ exchanges combined. These include State Bank of India, Tata Tea (owners of the Tetley brand) and Ashok Leyland.

  UKTI primarily concentrates on attracting knowledge-driven companies from India and this is reflected in a focus on the ICT, life sciences, automotive/advanced engineering, food processing, creative industries, and financial/business service sectors.

  UKTI is developing a £9 million programme of intensive support for innovative and R&D-intensive companies, in consultation with the RDAs, to:

    —  promote to multinationals and overseas companies the benefits of undertaking R&D in the UK;

    —  help multinationals and overseas companies to collaborate with UK companies and/or research organisations;

    —  help R&D-intensive UK companies to penetrate overseas markets and multinational supply chains; and

    —  support the sustainable internationalisation of new R&D-intensive UK companies.

  For overseas-owned companies, the programme will include the pinpointing and showcasing of relevant R&D excellence in UK research establishments and the wider knowledge supply chain.

  For UK-based businesses and organisations the programme will include tailored support to enable them to engage effectively with multinationals and to penetrate overseas markets sustainably, thereby maximising the return on their R&D investment.

  Key elements of the programme are:

    —  determining priority companies both for inward investment and as potential high-value exporters;

    —  targeting priority overseas companies with cross-public sector virtual teams, spearheaded by UKTI and involving the RDAs and others; and

    —  deploying a new cadre of up to 20 specialists with expertise in key technology sectors over the next two years.

  This work will be supported by a growing science and innovation network team within the British High Commission in India.

  By January 2007, we will have dedicated account managers in place for key business groups ie high-value potential investors, major exporters, exporters including medium sized companies, to emerging markets and R&D-intensive companies to ensure we are best placed to help our clients internationalise. From January 2007, we will develop relationships with these companies to inform them about opportunities in India, and to support them if they choose to develop business there.

E4.  UKTI Regional International Teams

  UKTI delivers to its international trade customers in the English regions through a network of nearly 40 International Trade Teams, provided typically by Chambers or Business Link operators, employing between them around 380 International Trade Advisers. In each region UKTI has an International Trade Director who, with their regional core team, are co-located with the RDA, and who are responsible for UKTI's strategy, delivery and stakeholder relationships in the region.

  On international trade (but not inward investment) UKTI has management responsibility for its own staff and programmes in the English regions and operates as the RDAs' international trade arm. This relationship reflects the importance of UKTI giving coherence to regional and national demands on the overseas network. We work in partnership with the RDAs on strategy and priorities through a nationally-agreed Dual Key Framework and jointly signed-off delivery plans at regional level.

Bangladesh—Trade and Investment

  The UK has been investing in Bangladesh for more than 200 years. UK companies invested $153 million in Bangladesh in 2005, making the UK once again the largest foreign investor in Bangladesh.

  The largest UK investment in Bangladesh is by Globeleq, which acquired a major stake in the power sector in late 2003, when it purchased two private power plants from US power giant AES. The value of that investment is around US$450 million. After purchasing a 50% stake in another plant earlier this year, Globeleq currently supplies 30% of power to the national grid.

  Cairn Energy acquired Shell's assets in Bangladesh in 2004. With their joint ventures partners, including Halliburton, Cairn's investment in gas exploration and production in Bangladesh now exceeds $400 million. Cairn currently supplies around 12% of Bangladesh's gas, primarily to the second and port city of Chittagong.

  There are over 50 UK investors operating in the market across a wide range of business sectors. Standard Chartered and HSBC are the largest foreign banks, and BAT, Unilever, Reckitt Benkiser and Duncan Brothers dominate many segments of the market for consumer goods.

  The total value of UK exports of goods to Bangladesh in 2005 was £80 million. UK imports of goods from Bangladesh in 2005 totalled £596 million. The UK's trade deficit with Bangladesh therefore for the year was £516 million.

2006 (Jan-Apr)

UK exports
UK imports
UK trade balance

(All figures are in £m)

  The UK's principal exports of goods to Bangladesh are:

    —  Scrap metal (£12 million in 2005);

    —  Petroleum products (£10 million); and

    —  Power generation equipment (£8 million).

  No statistics are currently available for the trade in services.

  The domestic market in Bangladesh has been boosted by a decade of GDP growth at an average of more than 5% per annum. An increase of 6% was posted for Bangladeshi fiscal 2005-06.

  UKTI Business Plan for Bangladesh for 2006-07 includes a sponsored inward mission from Bangladesh to UKTI's Technology World event in May 2006, and a likely outward mission from the Birmingham Chamber of Commerce in March 2007.

Pakistan—Trade and Investment

  UK Exports continues to show strong growth of 37.3% for the period (January to April, 2006) as compared to the corresponding period last year.

  The trade balance is still in favour of Pakistan, but since 2003 UK trade deficit is showing a downward trend. In 2005 UK trade deficit decreased significantly by 85% from £219 million in 2004 to £32.6 million.

  In Fiscal Year 2005-06, UK foreign direct investment into Pakistan stood at US$244 million, which is an increase of 34.4% as compared to US$181.5 million in FY 2004-05. UK share in total FDI for FY 2005-06 was 6.9% (main sectors—Petroleum Refining, Oil & Gas Exploration, Power, Communication (Telecom and IT), Cement and Financial Business).

  There are over 80 British companies operating in Pakistan, and plenty of interest from others. Recent investments include the British retailers Mothercare and Costa Coffee opening outlets in Karachi. Bestway Cement is also making a further investment of $140 million at their cement plant at Chakwal.

  Major players include Unilever, Shell, BP, GlaxoSmithKline, Standard Chartered Bank, International Power, British American Tobacco and ICI.

  Recently, Standard Chartered Bank completed the purchase of the Union Bank of Pakistan for $450 million. This acquisition makes Standard Chartered Bank of Pakistan (SCBP) the sixth largest bank in Pakistan by market share. SCBP had 46 branches in 10 cities and this is now extended by a further 65 branches and in an additional 12 cities. They aim to increase this to 150 branches during 2006.

  In addition to UK interest in the banking sector in Pakistan, we have been informed that the Oil and Gas Development Company Limited (OGDC) plan to launch on the London Stock Exchange Alternative Investment Market. The LSE are keen to build on the momentum that this listing will generate in the market.


2006 (Jan-April)
% Change

£169.9m US$295.6m
+37.3% *

Major Pakistani imports from UK are specialised industrial machinery, power generation machinery, Telecom and Broadcasting Equipment, chemicals, pharmaceutical and medical products.


2006 (Jan-April)
% Change

£178.4m US$310.4m
+8.3% *

Major Pakistani exports to UK are textiles (yarn, fabric, garments, towels & bedding), rice, leather and leather products, carpets and fruit.


Average UK market share of Pakistani Imports from OECD Countries (2004)

UK is the 4th largest exporter (2004) among OECD Countries to Pakistan
1—USA (22.4%) 2—Japan (15.4%) 3—Germany (10.3%) 5—Korea (7.3%)


Exports (£m)
Imports (£m)




Gold Powder
Paper and Paperboard
Electrical Machinery and Equipment
Man made staple fibres
Machinery and Mechanical Appliances
Articles of Iron and Steel
Woven fabrics
Knitted or crocheted fabrics
Copper and Copper products

    —  The UK is the largest European investor in Sri Lanka and the second largest investor overall.

    —  The UK's net investment in Sri Lanka over the last 20 years has averaged £50 million per annum.

    —  Investments during the last two years have grown from £108 million (year ending 2004) to £114 million (year ending 2005).

    —  The number of approved projects has also increased from 108 in 2004 to 126 in 2006, making UK the largest investor for the year in 2005.

    —  Major UK investments in Sri Lanka include HSBC's Global Service Centre, Aviva (Norwich Union) Regional Operating HQ and P&O led South Asia Gateway Terminal (SAGT) private container terminal in the Port of Colombo.

    —  Sri Lanka is among the most liberal economies in South Asia and in imported £137 million of British goods and services in 2005, making the UK the fifth biggest exporter to the country.

    —  Sri Lankan exports to the UK were £390 million.

    —  Recent governments have privatised public sector industries, abolished foreign exchange and import controls, reduced tariffs and adopted a development strategy to encourage foreign investment. Coupled with a relatively affluent population, these measures make Sri Lanka a good market for UK consumer goods both reconditioned and new.

    —  Sri Lanka is particularly attractive as an export destination for small and medium sized businesses with some exporting experience. If thinking of supplying to the rest of the India Sub-Continent or South East Asia, Sri Lanka makes an ideal location with it's geographical location on the main shipping routes, especially following the Indo-Sri Lanka Free Trade Agreement in 1998.

  The Sri Lankan economy has been growing at around 5% for over two decades, due to the relatively well-developed human capital and the continuation of market-friendly reforms since the late 1970s. However, past growth has not been sufficient to significantly reduce poverty beyond urban areas and to achieve faster growth and poverty reduction.

  Sri Lanka has been ahead of other countries in the South Asia region in implementing reforms such as trade liberalisation. But the macroeconomic framework remains fragile. While the private sector has been growing, the state still dominates key economic and financial services (eg power, transport). The state also remains the employer of first resort, absorbing about one half of formal sector employment.

  The 2005-06 Budget saw an increase in corporate taxes to 35%, with an additional 1% "corporate responsibility levy", and a rise in "sin taxes" on gambling, tobacco and alcohol. The additional money raised would be spent on subsidising fertiliser for farmers, increasing the payments for the Samurdhi (social welfare) system, providing 100,000 small grants for local improvements and the recruitment of 10,000 new civil servants a year.

  There is a real risk that instead of using borrowing to invest in major infrastructure developments, expensively borrowed money will be frittered away on minor projects and the inflationary impact of that borrowing has still to be assessed.

Impact of the Tsunami

  30,000 people in Sri Lanka died in the tsunami, a further 5,000 are missing. Up to one million people were initially affected with about 500,000 displaced. Some 78,000 houses were completely destroyed. The tsunami affected a broad range of income and ethnic groups. Before the tsunami, poverty in the worst affected areas was above the national average so the tsunami has further increased the vulnerability of these areas.

  However the impact on output and economic growth has been limited (perhaps slowing down GDP growth by 1%). The sectors affected (eg fishing) only represented a small part of national production. The financial response from the international community was unprecedented, including from NGOs, fully matching reconstruction costs. The UK agreed to pay 10% of Sri Lanka's repayments to the International Development Association for the next ten years (expected to be worth £70 million) and the Paris Club gave Sri Lanka a one-year moratorium on their bilateral debts.


  Sri Lanka has qualified for GSP+ status and will receive nil rates of duty for all eligible products covered by the general arrangement (with the exception of heading 0306 13 (shrimps and prawns) where the preferential rate of duty under the special incentive arrangements will be 3.6%).

  The Generalised System of Preferences (GSP) is one of the main mechanisms through which the EU grants preferential access through the reduction/elimination of tariffs for products from developing countries. A new GSP scheme will be info force from 1 January 2006. This is separate from the GSP+ that is a sub-scheme of the GSP and provides more generous duty reductions on imports from qualifying countries.

2   Sir Michael Arthur, British High Commissioner to India, Annual Review 2005. Back

3   See NAO's Business Monitor MA4 Foreign Direct Investment, tables 2.2 and 5.2 available at Back

4   72 staff in nine British High Commissions and Trade Offices. It is important for the FAC to note that UKTI resources include the British High Commissioner and his Deputies across South Asia, as well as our dedicated commercial teams. Back

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