India-EU FTA demands follow through

The conclusion of the India-European Union Free Trade Agreement comes at a moment of unusual stress in the global trading system. Rising geopolitical tensions, renewed tariff wars and growing scepticism about globalisation have made large, rules-based trade deals increasingly rare. Against this backdrop, the India EU agreement stands out not merely for its scale, but for what it signals about India’s willingness to remain engaged with global markets on negotiated terms. Moody’s assessment that the pact is “credit positive” for India provides a useful analytical frame, but the true significance of the deal will lie in whether India can translate tariff concessions into durable gains in manufacturing strength, investment inflows and export competitiveness.

At a headline level, the agreement is undeniably ambitious. Once implemented, more than 93 per cent of Indian goods exports will enjoy zero duty access to the EU, a bloc of 27 countries with high purchasing power and demanding quality benchmarks. Average EU tariffs on Indian goods, already relatively low at around 3.8 per cent, will fall close to zero. For labour intensive sectors such as textiles, apparel, leather, footwear, marine products, furniture, toys and sports goods, the removal of duties that currently reach as high as 17 or even 26 per cent could materially improve price competitiveness and market penetration.

This underpins Moody’s positive assessment. Better market access can strengthen export earnings, attract foreign firms looking to use India as a manufacturing base, and support employment generation in sectors that absorb large numbers of semi- skilled workers. In an economy where manufacturing has for years accounted for roughly the mid-teens as a share of GDP, any credible lever to alter this trajectory deserves attention. The agreement potentially aligns trade policy more closely with India’s longer-term goal of becoming a deeper participant in global manufacturing value chains rather than remaining primarily a consumption market.

The pact also reflects a strategic choice in India’s trade policy. Over the past decade, New Delhi has adopted a cautious, at times defensive posture, stepping away from mega regional trade arrangements while pursuing selective bilateral agreements. The EU deal fits this calibrated approach. Rather than overcommitting to broad regional frameworks, India is diversifying its trade relationships and reducing dependence on any single market. At a time of global trade turbulence driven by geopolitical shocks, supply chain realignments and protectionist pressures, this diversification functions as a form of economic insurance.

However, it would be a mistake to treat tariff elimination as a guaranteed windfall. The EU is among the world’s most demanding markets, with stringent regulatory regimes covering product standards, environmental compliance, labour norms and data protection. For Indian exporters, particularly small and medium enterprises, preferential access will translate into real gains only if they can meet these standards consistently and at scale. Market access on paper does not automatically confer competitiveness on the ground, especially in markets where non-tariff barriers often matter as much as customs duties.

This is where Moody’s emphasis on complementary reforms becomes critical. Trade agreements tend to amplify domestic strengths, but they also expose structural weaknesses. High logistics costs, fragmented conformity assessment systems, slow regulatory approvals and uneven enforcement of standards can erode the advantages of lower tariffs. If India is to attract sustained foreign investment into manufacturing, reforms in customs digitisation, port efficiency, testing and certification capacity, and export-oriented skilling will matter as much as the tariff schedules negotiated in Brussels.

The structure of concessions under the agreement also underlines the inherent trade-offs. While India gains near universal duty-free access to the EU for goods, it has committed to liberalising over 90 per cent of EU imports over a ten-year period, with immediate tariff removal for about 30 per cent of items. Sensitive sectors such as automobiles have been protected through calibrated liberalisation, but the direction of travel is unmistakable.

European carmakers will gain greater access to the world’s third largest auto market, with India agreeing to phased tariff reductions for a limited number of imported vehicles under quota-based arrangements. Duties, which currently exceed 100 per cent, will be lowered gradually for specific segments rather than across the board, introducing competition while preserving safeguards for domestic manufacturers. For consumers, this promises greater choice and potentially lower prices in premium segments. For domestic manufacturers, it introduces sharper competition. The principal risk is not an uncontrolled import surge, which is likely to be moderated through quotas and phased reductions, but the pressure this places on Indian firms to move up the value chain. 

The political economy of this transition should not be underestimated. Trade liberalisation inevitably creates winners and losers, at least in the short term. Managing resistance from affected industries, while ensuring that adjustment costs do not fall disproportionately on workers, will require careful policy sequencing and credible support mechanisms. Ignoring these domestic sensitivities risks undermining public support for the broader trade agenda and complicating future trade negotiations.

Services, often treated as a secondary consideration in goods-focused trade deals, represent another important dimension of the India-EU agreement. Europe remains an insufficiently tapped market for Indian IT and digital services, and Nasscom’s view that the FTA helps diversify export destinations is particularly relevant. With the United States accounting for a large share of India’s IT exports and becoming a more uncertain market due to visa restrictions and regulatory scrutiny, greater predictability in Europe offers a valuable hedge.

In services, the gains are less about tariff reductions and more about rules-based clarity. Improved frameworks for cross-border service delivery, professional mobility and the eventual conclusion of social security agreements can reduce friction for Indian firms operating in Europe. Over time, this could enable deeper integration of Indian companies into European value chains, not merely as outsourcing partners but as collaborators in areas such as artificial intelligence, semiconductors and clean technology. 

From a macroeconomic perspective, the agreement also carries important signalling value. Bringing two decades of negotiations to a close reinforces India’s reputation as a credible negotiating partner willing to engage with complex trade rules while safeguarding domestic priorities. 

Yet optimism should remain measured. Trade agreements are not substitutes for industrial strategy. The India-EU FTA will not, by itself, resolve India’s manufacturing constraints or insulate the economy from external shocks. It creates opportunity rather than outcome. 

The India-EU FTA is therefore best understood as a platform rather than a finish line. It lowers barriers, expands choices and embeds India more firmly in global trade networks at a volatile moment for the world economy.

The writer is a commentator on foreign policy and strategic affairs. With over two decades in political reporting, he writes on India’s diplomacy, trade policy, and the shifting balance of global power.