Guidance

Technical note of the potential additional fiscal revenue as a result of a UK-India Free Trade Agreement

Updated 23 May 2025

1. Summary

Free Trade Agreements (FTAs) reduce barriers to trade between partner countries which stimulate greater bilateral trade and higher economic activity. It is widely accepted that greater economic activity, as measured by Gross Domestic Product (GDP), results in higher government receipts. This is primarily due to increased tax revenue from higher individual and corporate incomes, as well as increased consumption and investment, all of which are taxed.

The UK-India FTA is estimated to increase GDP by £4.8 billion (0.1%) annually in the long run compared to having no FTA^{[footnote 1]} . These economic gains are in part generated by an increase in bilateral trade between the UK and India as a result of the agreement, estimated at £25.5 billion (38.8%) in the long run compared to having no FTA. The methodology behind these estimates can be found in our technical note of the preliminary economic impacts of the UK-India Free Trade Agreement.

This technical note sets out the Department for Business and Trade’s (DBT) illustrative analysis on the fiscal revenue that could be generated as a result of the UK-India FTA.

These results are not forecasts. They represent the marginal additional government revenue that could be generated as a result of the agreement compared to a counterfactual of no agreement in place while holding all other factors affecting UK - India economic relationship constant.

The fiscal impacts of an FTA are challenging to accurately estimate and are subject to uncertainties as they depend upon behavioural changes and the wider economic environment. Tax impacts are not typically assessed as part of FTA impact assessments due to the uncertainties around the estimates.

However, illustrative estimates using the Office for Budget Responsibility (OBR) Ready Reckoner fiscal tool,^{[footnote 2]} suggest the gains in additional government revenue associated with a UK-India FTA could be over £1 billion annually in the long run, once the economy has fully adjusted. The estimated results from the tool should be considered as a guide only, with the result only an approximation.

2. The economic impacts of FTAs and potential fiscal revenue   

FTAs can help to reduce the costs of trade between partner countries and can deliver a wide range of macroeconomic gains. This reflects increased specialisation across sectors, whereby better access to international markets and imports reshapes the economy to specialise sectors of comparative advantage. In the long run, greater specialisation and productivity increases the overall value of national output and income via the reallocation of resources towards expanding sectors of the economy.^{[footnote 3]}

FTAs can deliver economic gains through driving a more efficient allocation of resources within sectors. Enhanced openness to trade can spur innovation and the expansion of the most efficient firms within sectors, driving up the average productivity and wages within the sector, while at the same time, generating increased choice and lower prices for consumers.

FTAs can generate dynamic gains through trade-induced increases in productivity. These result from businesses benefitting from greater economies of scale or scope, increases in investment and research and development stimulated by access to larger markets, reductions in inefficiencies due to increased competition, or from positive spillovers between firms.

FTAs can finally stimulate distributional impacts– who is affected and by how much, depends upon the interaction of a range of complex factors, including the structure of each of the economies involved and what each country is relatively specialised in producing, sectoral patterns of trade in each country as well as the physical and institutional infrastructures in each country.

In addition, the distributional impacts are impacted by the ability of individuals and firms to adjust to increased trade and short-term and long-term domestic policies.

It is widely accepted that greater economic activity, as measured by GDP, results in higher government receipts. Historic data has shown that government revenue reduces in periods of economic slowdown and contraction.^{[footnote 4]} Greater economic growth and activity stimulates higher government revenue due to increased tax revenue from higher individual and corporate incomes, as well as increased consumption and investment. When the economy is growing, individuals and businesses tend to earn more money. This leads to higher income tax revenues for the government. With greater economic activity, there’s more spending and investment in the economy. This generates more sales taxes, corporation taxes, and other forms of tax revenue.

3. Illustrative analyses on the potential fiscal revenue generated as a result of the UK-India FTA

Macroeconomic modelling of a UK-India FTA is estimated to increase UK GDP compared to a scenario without an FTA. The estimated long-run increase in UK GDP is 0.1%, which is equivalent to £4.8 billion change in the long run level of GDP that the country will gain permanently, each year.

The Office for Budget Responsibility (OBR) Ready Reckoner tool allows users to obtain indicative estimates of the impact that a policy change can have on key fiscal variables.^{[footnote 5]}

The fiscal impacts of an FTA are challenging to estimate and are subject to significant uncertainties depending upon behavioural changes and the wider economic environment. Tax impacts are not typically assessed as part of FTA impact assessments due to uncertainties around the estimates. However, to provide an indication around the potential scale of additional government revenue that could be generated, the OBR’s Ready Reckoner tool is used by inputting the percentage point change estimates of the UK-India FTA derived from the Computable General Equilibrium (CGE) macroeconomic modelling.

This includes inputting the following CGE modelling results to the OBR Ready Reckoner:

• earning levels (wages) (0.2%)
• nominal consumer spending
• real consumer spending
• real investment
• real GDP (0.1%)
• non-seasonally adjusted GDP

The tool takes these inputs associated with the impact of the UK-India FTA and simulates the fiscal impact of changes to key economic determinants of the fiscal forecast.

The tool uses the ready-reckoners consistent with the March 2024 economic and fiscal outlook (EFO) to generate illustrative estimates of the impact that a particular change in one or more economic variables would have on fiscal variables. The estimated results from the tool should be considered as a guide only, with the results only an approximation.

The indicative results suggest that the UK-India FTA could increase the public sector receipts by £1.8 billion annually in the long run.

An even more simplistic approach would be to apply the estimated changes in UK GDP as a result of the UK-India FTA to the UK’s estimated tax-to-GDP ratio. In the tax year 2024-25, this was equivalent to 35.3% of GDP.^{[footnote 6]} When applying this tax-to-GDP ratio (35.3%) to the estimated long run gains in UK GDP as a result of a UK-India FTA (£4.8 billion), the illustrative tax revenue that would be generated from the deal would be approximately £1.7 billion in the long run.  

4. Caveats

This illustrative analysis does not account for any potential future changes in UK tax policy.

The OBR Ready Reckoner tool is based on March 2024 economic growth forecasts which means that it is also based on government policy as it was in March 2024 and corresponding estimated elasticities (behavioural response).

The OBR Ready Reckoner tool is based on the medium-term economic outlook to determine fiscal impacts out to 2029/2030. Whereas the macroeconomic modelling results of the UK-India estimate the economic impacts in the long run (considered to be 10 to 15 years after the agreement has been implemented). The sectoral impacts associated with the UK-India FTA are not captured.

This methodology is based on applying the tax-to-GDP ratio in 2023/24 to long term economic growth impacts of UK-India FTA. The actual tax-to-GDP ratio in the long term may increase. As it stands, the OBR predict that the tax-to-GDP ratio will rise to 37.5% by 2029/2030.^{[footnote 7]}

The estimated impacts come with the associated caveats that come with CGE modelling: it is based on and is dependent on the utilisation of the trade agreement, which will be known over time. The estimated impacts derived from CGE modelling come with all the inherent uncertainties and limitations associated. More information can be found in the technical note of the preliminary economic impacts of the UK-India FTA.

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1. The UK GDP impacts are estimated based on the OBR’s Short and Long-term determinants. ↩

2. The most recent version of the tool, published July 2024, can be accessed here: OBR Ready reckoner and supplementary forecast information release. ↩

3. FTA impact channels, in the context of trade liberalisation more generally, are outlined in greater detail in the UKTPO Briefing Paper (July 2019): ‘Winners and Losers from International Trade: What do we know and what are the implications for policy’. ↩

4. HMRC tax receipts and National Insurance contributions for the UK (annual bulletin), April 2025, Figure 1. ↩

5. (The OBR ready reckoner.), updated July 2024. ↩

6. March 2025 Economic and fiscal outlook – charts and tables: Chapter 4 (Annex table 4.1). ↩

7. OBR Economic and fiscal outlook, March 2025. ↩