THE BLOG

A Great Relationship?

27/02/2013 15:19 GMT | Updated 29/04/2013 10:12 BST

Last week the UK prime minister, David Cameron, was in India making a strong pitch for bilateral trade, talking of the potential for a "great relationship" to be formed between the two countries. On the surface, Britain and India have much in common, including a language, a legal system, and cultural links. However, all this potential is yet to be translated into the unique relationship that Britain says it desires. Mr Cameron's visit is unlikely to swing the balance.

With a stagnating domestic economy that is poised to grow by a meagre 0.5% in 2013, Mr Cameron is understandably keen to boost trade and investment links with emerging markets, India in particular. The prime minister has spoken of ties of "history, language, culture" that bind the two nations, and since coming to power in 2010, has overseen an increase in engagement with India. Over one-half of the UK cabinet has visited India in the past two years, averaging a minister a month. Yet in 2011, India's trade with China, the US, Indonesia, and even Switzerland all dwarfed its bilateral trade with the UK.

No major deals were announced during the prime minister's visit. Unlike countries such as Japan and France, where diplomacy and soft loans drive investment from businesses, UK corporates prefer to go it on their own, and receive relatively little support from the government. Mr Cameron did attempt to push several defence deals, including the UK-based BAE's efforts to supply the Indian army with howitzers and another deal on air-to-air missiles. Last year a French manufacturer, Dassault Aviation, emerged as the preferred bidder to supply the Indian government with 126 fighter jets, beating a UK-backed consortium which builds the Eurofighter Typhoon. That deal, which would be one of the largest purchases of planes in decades, is yet to be inked, and Mr Cameron again promoted the advantages of the Typhoon over the French-built Rafale jets. However, these efforts were overshadowed by allegations last week of yet another graft scandal in India's defence procurement, which is likely to slow down India's push to modernise its Cold War-era equipment.

The myriad difficulties of doing business in India will constrain rapid growth in bilateral trade. One aspect that the Indian government needs to address is the country's onerous regulatory landscape. The domestic services sector is still highly regulated in India and both politicians and citizens view foreign investment with some suspicion. The current government has made some progress in this regard, opening up aviation and retail to foreign investment last year, and promising that insurance and pensions will follow soon. However, these reforms were met with vocal protests from trade unions (which called for a two-day nationwide strike in the same week as Mr Cameron's visit), opposition politicians, and indeed, from within the ruling coalition. With the government's popularity dipping and the next general election less than 18 months away, it remains to be seen whether it has the appetite for any more contentious reforms this year.

During his sojourn in India, Mr Cameron predictably called for the liberalisation of trade in goods and services. The Indian government responded by calling for liberalisation in the movement of people - a sore point in bilateral ties. The Conservative-led government has clamped down on immigration since coming to power, famously promising to lower net immigration from hundreds of thousands to tens of thousands, earning the ire of the Indian government. Mr Cameron attempted to address this, announcing a "same day" visa service for business visitors and saying that Indian students and investors were welcome to the UK. This is far short of the visa-free travel that India is said to want but is unlikely to get.

Overall, the liberalisation of trade will be slow, constrained by domestic politics in India, and the UK is unlikely to be able to offer the soft financing and transfer of technical knowledge that other competitors can give India. Although British firms are keen for greater access to Indian markets, the UK is unlikely to enjoy any particular privileges, Mr Cameron's efforts notwithstanding.