Will India's red-hot deal-making season continue with a free trade agreement?

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The big story

Ola Electric is set to raise nearly three quarters of a billion dollars with a stock market listing, while medication maker is locked in a $1.6 billion deal to buy the Covid-19 vaccine developer Bharat Serums & Vaccines.

The transactions announced recently among Indian corporates represent only a small portion of the actual dealmaking activity. Similarly, Indian politicians seem to be in agreement on this matter.

David Lammy, the U.K.'s new foreign minister, visited New Delhi only weeks into his tenure. "Our Free Trade Agreement negotiations are not the limit of our aspirations to unlock our shared potential and deliver growth, from Bengaluru to Birmingham," Lammy said last week before his visit.

How close is an agreement?

A free trade agreement with India would be the "most significant" deal for the U.K. since the Brexit vote, according to Chietigj Bajpaee, senior research fellow for South Asia at the thinktank Chatham House.

The deal would result in a significant influx of investment in India, potentially leading to thousands of job opportunities, which aligns with Indian Prime Minister Narendra Modi's third administration's top priority.

Aastha Gudwani, Bank of America's India economist, stated that both countries could experience substantial economic benefits from a comprehensive accord.

The U.K. has signed trade deals with Singapore and Japan, two countries with which India has long had Comprehensive Economic Partnership Agreements (CEPA) with. Additionally, India and the U.K. both rank highly on the World Bank's Trade Complementarity Index, indicating their natural trade partnership.

The urgency to fulfill commitments is now high on both sides, as both countries have a new mandate to negotiate deals, according to Keshav Murugesh, CEO of the NYSE-listed business process outsourcing firm, in an interview with CNBC's Inside India.

India's demands

The U.K. government has struggled to convince its voters that allowing foreign workers to enter the country for business purposes would boost the economy in the past. However, the current Labour government seems to be more open to the idea.

Murugesh explains that companies with hundreds of employees in the U.K. need to occasionally bring in experts in specific sectors to win new business. These professionals are often required to visit the U.K. to understand potential clients' needs and are expected to travel back to India to produce a solution.

"Murugesh clarified that the individuals arriving were not potential immigrants, but rather individuals who were in the country to work on a global project that would greatly benefit a U.K.-based company."

India is also interested in obtaining an exemption from the U.K.'s Carbon Border Adjustment Mechanism (CBAM), which imposes a tax on carbon-intensive products and penalizes goods produced in countries that are not making enough progress towards decarbonization.

According to BofA's Gudwani, in a research note to clients, India argues that the imposition of a carbon tax could diminish the concessions agreed upon in the FTA.

The U.K.'s largest trading partner, the European Union, will implement a similar levy on goods sold into the EU in 2026. Any loopholes created by the U.K. could result in the country losing out on a better trading arrangement with the EU.

The UK's demands

India ended bilateral investment treaties with over 50 countries in 2017, resulting in no current agreements between the U.K. and India. These treaties have traditionally protected investors and companies investing in India.

The Indian government and U.K. companies, including , and Cairn Energy, have had several disputes over the seizure of Air India's aircraft to enforce a $1.2 billion arbitration award. As a result, the U.K. is unlikely to agree to any deal without investor protection.

Need to know

The BJP is currently debating whether India should accept Chinese investments, with an "internal battle" taking place within the ruling party. According to Alicia Garcia-Herrero, chief Asia Pacific economist, the BJP is considering inviting Chinese investments, but India's trade minister has stated that there is currently no rethinking on the matter.

What happened in the markets?

The Indian stock market reached a new record high, with the index surpassing 25,000 points for the first time. Despite the global economic downturn, the Indian market has risen 15.09% this year, outpacing the broader market, which has increased by 14.87%.

The Indian government bond yield has decreased to 6.91%, reaching its lowest point since April 2022.

Erez Israeli, CEO of Dr. Reddy's, a generic drug maker, stated on Biz Focus Hub that over the next decade, about 90% of the drugs facing the "patent cliff" will be in the biologics space. Israeli added that Dr. Reddy's is planning to play in the biosimilar business. Dr. Reddy's is also a U.S.-listed company.

India's largest airline CEO, Pieter Elbers, discussed the airline's policy of allowing women to opt out of sitting next to men on flights during an interview with CNBC's "Street Signs Asia."

What's happening next week?

Ceigall India, an infrastructure construction firm and Akums Drugs & Pharmaceuticals, will debut on the stock market next week.

August 4: Australia interest rate decision

The PMI for India, the euro zone, and the United States was released on August 5th.

August 8: India interest rate decision