India’s UK free trade deal to cost Rs 4,060 crore in year one as tariffs fall

By: Shantanu Bhattacharji

Recent duty cuts in trade pacts have raised concerns over shrinking customs revenues, but economists say tariffs should support trade goals—not just fill the coffers.

India is poised to lose an estimated Rs 4,060 crore in customs revenue in the first year of its new free trade agreement (FTA) with the United Kingdom, according to projections by the Global Trade Research Initiative (GTRI). The shortfall stems from reduced or zero tariffs on a wide range of British imports.

While this may affect short-term government revenue, New Delhi believes the long-term economic benefits will make up for the loss. The deal is expected to boost export competitiveness—especially in labour-intensive sectors such as textiles and apparel—and improve market access for Indian services firms in the UK. It could also help attract more foreign investment. The agreement marks a broader shift in India’s trade policy, focusing on deeper global integration even at the cost of some immediate revenue.

The trade agreement, signed last week, includes phased tariff reductions that are projected to increase India’s annual revenue loss to Rs 6,345 crore by the tenth year of implementation. Based on FY2025 trade data, the figure is equivalent to roughly £574 million.

India gave up nearly Rs 94,172 crore in customs revenue in FY25 due to lower import duties under free trade agreements with Japan, South Korea, and Asean, according to finance ministry data.

While FTAs aim to boost trade and give Indian exporters wider market access, they’ve also come at a steep fiscal cost. Cheaper imports are good for consumers and manufacturers reliant on global supply chains—but they hurt domestic producers and erode tariff revenues. Several reports mentioned that the government is reviewing several existing FTAs, especially with ASEAN, amid concerns of uneven gains and trade imbalances.

For FY26, the Centre has budgeted Customs revenues to grow only 2.1 per cent to Rs 2.4 lakh crore. Under the UK FTA, tariffs will be removed or reduced on 90 per cent of goods, and 64 per cent of products will become duty-free once the agreement comes into effect. India is also expected to sign trade deals with the US and the EU this year, which could further pressure Customs duty collections. 

Analysts say the modest growth projected in customs revenue for FY26 signals that the Centre’s ability to raise funds through trade taxes is narrowing. Balancing the benefits of global trade deals with the need for stable public finances will remain one of the government’s toughest economic challenges ahead.

According to Budget documents, the highest revenue forgone due to FTAs in FY25 was from Asean (Rs 37,875 crore), followed by Japan (Rs 12,038 crore) and South Korea (Rs 10,335 crore).

Recent trade deals that slash import duties have triggered concern within the revenue department, where officials worry that tariff concessions could dent customs revenues. But economists caution against using tariffs primarily as a revenue-raising tool.

Relying on customs duties to plug fiscal gaps is shortsighted, they argue. Raising tariffs might increase collections in the short term, but it distorts markets, burdens consumers, and ultimately stifles growth. Instead, duties should be applied with a strategic focus—shielding sensitive sectors such as agriculture or responding to unfair trade practices such as dumping.