India-UK FTA: The twin threats that could derail India’s $120 billion trade ambition

On May 6, 2025, India and the UK finalised a Free Trade Agreement (FTA) that aims to double trade between the world’s fifth and sixth-largest economies in goods and services, increasing it from $60 billion currently to $120 billion by 2030. The deal promises to boost economic cooperation, remove trade barriers, and increase investment and job creation. This is a big development considering the ongoing chaos in global trade caused by Trump’s reciprocal tariffs.

In FY25, the total trade between both countries reached $21.33 billion; India’s exports to the UK increased by 13.3% over a year to $12.9 billion, while imports from the UK fell by 6.1% to $8.4 billion.

However, experts and industry stakeholders have expressed some concerns regarding the FTA, particularly on two key issues—the UK’s carbon tax and the slow progress of the Bilateral Investment Treaty (BIT) between the two countries. According to them, the UK’s Carbon Border Adjustment Mechanism (CBAM), commonly referred to as a carbon tax, could disrupt the balance in the India-UK FTA. The CBAM, set to launch in 2027, will impose a levy on imports from countries that have lower or no carbon pricing, targeting sectors such as aluminium, cement, fertiliser, hydrogen, iron, and steel.

Experts warn that the UK’s carbon tax could harm Indian exports, while the influx of duty-free UK goods into India may further disrupt the trade balance, Moreover, the India-UK BIT is still unresolved, raising concerns regarding dispute resolution timelines and taxation provisions. They contend that these issues must be addressed to fully realise the full potential of the FTA.

Carbon tax: Implications for India
New Delhi-based think tank Global Trade Research Initiative (GTRI) says that the FTA lacks provisions to address the UK’s carbon tax, which could undermine the benefits India expects from the agreement. “The CBAM issue has not been addressed in the FTA, and there is also no noise from the industry,” says Ajay Srivastava, Founder, GTRI.

GTRI’s estimates suggest that the UK’s plan to introduce a carbon tax on products such as iron and steel, aluminium, fertiliser, and cement could impact India’s exports to the UK, potentially amounting to $775 million.

Earlier this month, Commerce and Industry Minister Piyush Goyal also expressed his concerns over the UK’s proposed carbon tax, warning that India may impose retaliatory duties if the tax is levied on Indian goods. “Trade talks are going well, but if they (EU, UK) put a carbon tax, we will retaliate. I think it will be very silly, particularly to put a tax on friendly countries like India,” says Goyal, during his address at the Columbia India Energy Dialogue 2024 in New Delhi on May 7, 2025.
Exporters, particularly in energy-intensive sectors like steel, view the India-UK FTA as a welcome development; however, they believe that the carbon tax poses considerable challenges for Indian exporters. “To make the FTA truly fair, the UK and India must agree on mutually recognised carbon measurement frameworks and perhaps even a green transition fund or carve-outs for exporters making sincere efforts to decarbonise. As far as I understand, the final FTA text hasn’t adequately resolved this. This could leave Indian steel and auto part exporters paying a ‘green tax,’ while British goods enjoy zero tariffs here, a concern that merits urgent policy attention,” says Panckaj N Umrania, Executive Director, KND Steel.

Former Finance Secretary Subhash Chandra Garg points out that the FTA doesn’t mention the UK’s carbon tax, which implies that it will probably stay the same. However, he supports global efforts to control carbon emissions, including CBAM, as a strategy to address climate change. “I would, therefore, expect the Indian industry to quickly become compliant with CBAM and capture the CBAM-compliant products market in the UK and Europe, instead of fighting for concessions from CBAM, which are unlikely to be available,” Garg says.

But Kanishk Maheshwari, Co-founder & Managing Director of Primus Partners, believes that India should engage in bilateral consultations with the UK to explore exemptions or compensatory measures regarding the proposed carbon tax. He recommends invoking rebalancing provisions under the FTA and developing a domestic carbon framework aligned with global norms to address the issue and restore balance in trade relations. “The fact that CBAM will not be implemented until January 2027 may have allowed negotiators to finalise the FTA while deferring the resolution of CBAM-related issues to future discussions,” says Maheshwari.

In fact, Indian negotiators should aim to extend the implementation timeline of the UK’s carbon tax by 3-4 years, says Maheshwari. He emphasises the importance of proactive engagement with the UK to ensure the carbon tax doesn’t undermine the benefits and reciprocity envisioned in the FTA. “Other than this, the government may think of introducing some incentivisation programme to support potentially impacted sectors and neutralise the cost disadvantage,” notes Maheshwari.
A rebalancing mechanism
The India-UK FTA does not completely overlook carbon tax. The FTA features a rebalancing mechanism. “This provision, under the general exceptions chapter, allows India to seek compensation or take remedial action if the carbon tax negatively impacts its exports to the UK,” explains Ravi Saxena, CEO & Founder of Wonderchef. This mechanism, according to Saxena, can help India protect its trade interests.

“CBAM is purely calculated solely based on the additional investments required by a country to manage emissions. This will be a small percentage of the overall cost. Indian suppliers would still be highly competitive considering the lower cost of wages as well as economics of scale since India is on a path to becoming a major global player and exporter in certain industries,” says Saxena.

Stakeholders are of the opinion that the UK’s carbon tax will be addressed through ongoing negotiations between India and the UK. Although CBAM is still under review, they believe that issues related to its implementation will be resolved gradually through mutual discussions and agreements.

“India respects the UK’s right to pursue environmental objectives; however, their implementation should be WTO-compliant to safeguard the economic interests of developing countries. It is true that CBAM was not clearly explained in the finalised FTA text, except for a briefing on institutional frameworks, things like dedicated working groups and review mechanisms can be discussed to create a smooth path for the future,” says Gautam Mohanka, CEO, Gautam Solar.

Experts say that FTA doesn't directly address CBAM or exempt India, potentially leading to trade imbalances. However, to address this, India could seek exemptions or compensatory measures through bilateral consultations, invoke rebalancing provisions under the FTA and develop a domestic carbon framework aligned with global norms, they add.

"The fact that CBAM will not be implemented until January 2027 may have allowed negotiators to finalise the FTA while deferring the resolution of carbon tax-related issues to future discussions. Indian negotiators should try extending this CBAM issue for next 3-4 years. Proactive engagement is essential to ensure CBAM does not undermine the FTA’s intended reciprocity," says Maheshwari.

BIT concerns
The India-UK FTA is done; however, experts and stakeholders emphasise both the countries must resolve outstanding issues, particularly the Bilateral Investment Treaty (BIT). They say the unresolved BIT status could impact investor confidence and bilateral investments, potentially affecting the overall success of the economic partnership between the two countries.

For context, the India-UK Bilateral Investment Treaty (BIT) was signed in 1994 and came into effect in 1995. In an effort to revamp its investment treaty framework, India unilaterally terminated the treaty on March 31, 2017, along with 57 other BITs. The decision was made to address concerns over investor-state dispute settlement (ISDS) provisions and to modernise the investment treaty framework, with the goal of achieving a more balanced approach to investment protection and dispute resolution.

Notably, India and the UK have been negotiating for a new BIT since 2022, alongside the FTA and double taxation convention. The FTA has been finalised; however, negotiations for a BIT are still ongoing, with issues such as dispute resolution and investment protection remaining unresolved.

Complex issues like the UK’s carbon tax and the BIT require time to resolve, says former Commerce and Industry Minister Suresh Prabhu. “These matters need careful consideration to ensure mutually beneficial outcomes for both countries.”

“Trade and investment are interconnected but distinct aspects. Both are crucial and can be negotiated separately or together. These issues will likely need to be addressed over time. Trade deals often involve ongoing negotiations and implementation, so it's normal for some matters to be tackled as they arise,” adds Prabhu.

Garg, on the other hand, believes that India’s adoption of the 2016 Model BIT template that was introduced to address concerns over investor-state disputes may have limited the country’s flexibility in investment negotiations. “Nothing is going to happen on the BIT front until India junks the 2015 template,” he says.
The new BIT template introduced in 2015-16 made it more challenging for foreign investors to pursue international arbitration, highlighting India’s attempts to rebalance investor protections and sovereign rights. India has signed four BITs based on its new template; however, only two are currently in effect. Experts note that the government has since prioritised FTAs over standalone investment treaties.

Experts argue that scrapping the BITs has deterred foreign investors, as these agreements previously provided a layer of protection from domestic judicial proceedings and ensured a more favourable dispute resolution framework.

India is currently renegotiating Bilateral Investment Treaties with 37 countries using its 2016 Model BIT template. This template requires investors to exhaust local remedies for at least five years before seeking arbitration, potentially making new BITs challenging for other countries. According to a 2022 paper published in The Review of International Organisations, India experienced a significant reduction of over 30% in foreign direct investment (FDI) inflows after terminating its BITs. “We need to modify our BIT model to make it look good for partner countries,” says Srivastava.

Meanwhile, industry stakeholders agree that a robust BIT is crucial for providing legal certainty and protecting investments in both countries. Both nations should prioritise resolving outstanding issues to establish a comprehensive and balanced investment framework that fosters mutual economic growth and cooperation, they say.

“Perhaps a robust arbitration framework can be put in place via a government-to-government level agreement empowering this extra-judicial body to be able to take quick and fair decisions. Unresolved cases will, of course, need legal intervention, but the majority of issues can be resolved with speed,” adds Saxena.

Mohanka suggests that both sides should expedite dialogues and explore legal innovations to craft a modern BIT that addresses investor grievances and adapts to the evolving nature of global investment flows, ensuring legal certainty for investors.

Similarly, Umrania believes that an impasse on BIT affects investor confidence, as delays in dispute resolution and tax-related issues, such as retrospective taxation, have historically unsettled investors. The UK seeks quicker arbitration routes, but similar negotiations with the EU, Canada, and others face roadblocks, highlighting the complexity of reaching a mutually beneficial agreement, says Umrania. “We must focus on resolving this, not just for the India-UK corridor, but across all FTAs. Investments don’t flow just on tariff terms; they follow legal stability and trust. Finalising a modern, balanced BIT with investor protection and sovereign safeguards is crucial for making any FTA truly effective in the long term,” says Umrania.