India and the United Kingdom may have signed a landmark Free Trade Agreement (FTA) on May 6, 2025, aiming to double bilateral trade from $60 billion to $120 billion by 2030—but experts warn two major issues threaten to derail this ambitious vision: the UK’s proposed carbon tax and unresolved negotiations on the Bilateral Investment Treaty (BIT).
FTA Aims for Big Growth, But Hurdles Remain
In FY25, total trade between India and the UK touched $21.33 billion. Indian exports rose by 13.3% to $12.9 billion, while imports fell 6.1% to $8.4 billion. While the FTA promises to boost trade, investment, and job creation, its long-term effectiveness is under scrutiny.
Threat 1: UK’s Carbon Border Adjustment Mechanism (CBAM)
The UK’s planned CBAM, or carbon tax—slated for 2027—will impose levies on imports from countries with no or lower carbon pricing, including key Indian exports like steel, cement, aluminium, and fertilizers.
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According to the Global Trade Research Initiative (GTRI), this could impact $775 million worth of Indian exports.
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Commerce Minister Piyush Goyal, speaking at the Columbia India Energy Dialogue 2024, warned that India may impose retaliatory tariffs if the carbon tax is enforced:
“If they (EU, UK) put a carbon tax, we will retaliate. It will be very silly, especially to target friendly countries like India.”
Industry voices, like Panckaj N Umrania (KND Steel), call for:
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Carve-outs for decarbonising exporters,
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Mutually recognised carbon frameworks,
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And a green transition fund.
Ravi Saxena (Wonderchef) highlighted the rebalancing provision in the FTA that could help India seek compensation if the carbon tax negatively impacts exports.
Threat 2: The BIT Stalemate
While the FTA is in place, the Bilateral Investment Treaty—crucial for legal clarity and investor protection- remains unresolved.
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India terminated its 1994 BIT with the UK in 2017 as part of a larger shift to the 2016 Model BIT template, which demands foreign investors exhaust local remedies for five years before seeking arbitration.
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According to a 2022 Review of International Organisations paper, India saw a 30% drop in FDI inflows after terminating older BITs.
Experts like Subhash Chandra Garg and Suresh Prabhu suggest that:
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India’s rigid BIT model may deter investment,
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Revisions are needed to restore confidence,
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And arbitration mechanisms must be modern, fast, and fair.
Srivastava (GTRI) stressed that the current model limits India’s flexibility, and unless it is modified, real progress on BITs will remain stalled.
The Road Ahead
Both governments are expected to use the coming months to iron out these issues before CBAM takes effect in 2027. Stakeholders suggest:
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Extending CBAM implementation by 3–4 years,
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Launching bilateral consultations for exemptions,
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And aligning domestic carbon frameworks with global standards.
On BITs, a more investor-friendly template may pave the way for a modernised agreement. Gautam Mohanka (Gautam Solar) recommends dedicated working groups and review mechanisms, while Ravi Saxena advocates for a government-backed arbitration setup.
The India-UK FTA is a major step forward, but its success hinges on resolving the carbon tax conundrum and finalising a strong BIT framework. These are not just legal or economic issues—they are key to ensuring trust, stability, and fairness in the next phase of India’s global trade story.
( inputs -ET)
