India and Europe: A Growing Economic Partnership in a Changing World

In a landmark visit to New Delhi last month, the European Commission and the College of Commissioners reinforced the strategic ties between the European Union and India, which led to the resumption of the India-EU Free Trade Agreement negotiations. Further, EAM Jaishankar’s visit to UK and Ireland this month concluded with a commitment to strengthen bilateral ties through economic and technological cooperation. Recent developments bring to the forefront opportunities and challenges of a growing India-Europe economic partnership amidst evolving geopolitical and geoeconomic dynamics.

Historical Overview of India-Europe Economic Partnership

The India-EU Cooperation Agreement dates to 1994, which led to the development of a multi-tiered institutional architecture of cooperation, eventually upgraded to a Strategic Partnership in 2004. As the trade between the two partners grew, the parties began negotiation on a Broad-based bilateral Trade and Investment Agreement (BTIA) in 2007. However, due to diverging ambitions, the talks were stalled in 2013. In 2022, India and EU resumed negotiations on an FTA, and despite a shared commitment, India and EU have seen slower-than expected progress.

The EU is India's largest trading partner, accounting for €124 billion [3] worth of trade in goods in 2023 or 12.2% of total Indian trade. Conversely, India is the EU’s 9th largest trading partner, accounting for 2.2% of the EU's total trade in goods in 2023. Trade in services between the EU and India reached €59.7 billion [3] in 2023, up from €30.4 billion in 2020. Being the world’s third and fifth largest economies in the world respectively, the EU and India both are to gain from the proposed agreement, from a political as well as economic point of view.

In economic terms, the agreement will encourage free-flowing trade and investment between the two regions. EU being India’s largest investment partner as well, proves to be a strategically important actor in India’s foreign and economic policy. Similarly, the agreement would grant free access for the EU firms to the Indian market of over a billion people, showcasing the untapped potential in economic relations. Politically, on one hand, it will be the EU’s first such agreement with an emerging economy. This would not only support the EU’s aim of employing FTAs to accelerate the integration of partner countries into the global economy, but also strengthen its role in global trade governance. On the other hand, the agreement will provide a boost to Prime Minister Narendra Modi’s ‘Make in India’ initiative and strengthen India’s position as a regional leader and a global economic power.

Similarly, post-Brexit, the UK has been actively pursuing new FTAs to compensate for the lost EU market access. With the UK being India’s 16th largest trading partner, the total trade in goods and services between the UK and India was £40.9 billion [4] in FY 2023-2024. India was UK’s 11th largest trading partner, accounting for 2.4% of the total UK trade. Dealing with 26 policy areas, negotiations on the India-UK FTA started in January 2022, but were paused in May 2024 after 14 rounds of negotiations. In a pursuit to strengthen ties with world’s leading economic powers, India is looking to boost its economic growth by providing access to British exports to India’s dynamic market and boosting investments that support over 600,000 jobs [5] across both countries.

Major Challenges and Areas of Divergence

The EU as well as India have voiced their concerns over restrictive measures being practiced by both the actors, in the form of barriers on their exports. The EU has certain regulations and standards on India’s agricultural and pharmaceutical exports and similarly seeks massive cuts in Indian tariffs on automobiles and auto components. There have been instances of disagreement in issues of tariffs in cars, wines, and dairy products imported from the EU. While the EU seeks tariff elimination on over 95% of its exports, India is willing to open up only 90% of its market [6].

Whereas the EU would like lower duty on various dairy products, India continues to practice a basic customs duty [7] of 60% on milk powder, 40% on cheese, yogurt, ice cream, and whey, and 30% on buttermilk. There has also been a divergence on the issue of liberalization of the visa regime for Indian professionals entering the EU borders. The provision to allow skilled Indian professionals to temporarily reside and work in the EU would benefit Indian businesses significantly through opening up of the EU services market. There has also been disappointment following the EU’s legally binding ban of over 700 pharmaceutical products [8] that had been previously clinically tested in India. In addition, the EU does not recognise India as a data secure country, restricting the flow of sensitive data and disabling the Indian firms from gaining access to the European markets, subsequently increasing operating costs.

Indian businesses are also skeptical of the impact of various new EU regulations such as the carbon tax, sustainability measures, and supply chain rules. As the Carbon Border Adjustment Mechanism (CBAM) comes into effect from January 1, 2026, tariffs will apply on goods from seven carbon-intensive sectors imported into the EU- including steel, cement, fertilizer, aluminum, and hydrocarbon products. This would further create a trade barrier, adversely impacting India’s exports to the EU.

Similarly, the key demands of UK include lower duties on cars and insurance liberalisation. High tariffs in India on Scotch Whisky and relaxation in fees and visa rules for Indian students and professionals going to the UK remain sticking points in the India-UK FTA. In addition, with the UK’s CBAM, similar to that of the EU, set to come into force from January 1, 2027, Indian businesses may may face higher compliance costs and legal obligations, leading to a loss in revenue as well as decreased competitiveness for Indian businesses.

Importance of India-Europe Partnership amid Geoeconomic Developments

In a relatively unstable geoeconomic environment and reshaping global supply chains, one of the most important political motives for India remains to reduce its economic and technological dependence on China. Similarly, the EU seeks to decouple from the Chinese markets with an aim to reduce over-reliance on Chinese manufacturing. Considering the Russia-Ukraine War entering its 4th year, the EU is also in need to secure alternative energy sources, highlighting the importance of India-EU collaboration on clean energy, technology transfers, and digital trade.

With Trump’s ‘America First’ policies amid rising protectionism, and the US imposition of tariffs on Canada and Mexico, the American disregard for trade rules laid down by the World Trade Organisation has become evident. This raises a concern for India in context of the US adherence to the legal bilateral trade agreement (BTA) to be signed with India by the end of this year. Further, with Trump’s constant threats of imposing 25% tariffs on all goods coming in from the EU to the USA, there is a likelihood of escalating economic policy conflicts amidst intensified trade wars. As global trade dynamics are entering an uncharted territory, a stronger India-EU and India-UK FTA can help mitigate the risks of US isolationism by expanding market access for both sides.

A Growing Partnership

In a landmark visit, European Commission President Ursula von der Leyen and the College of Commissioners visited New Delhi on February 27-28, to deepen relations with the largest democracy in the world, marking the beginning of a new chapter in the history of India-EU relations. This top-level engagement resulted in the resumption the India-EU FTA talks, with a clear deadline to finalise the agreement by this year-end. The 10th round of negotiations took place from March 10-14 in Brussels. From the Indian side, the concerns around wines, dairy, automobiles, and flexibility of professionals persist. The Union has been demanding a duty cut on wines to 30-40% from the current 150% and on automobiles to 10-20% from the current 100-125%. Conversely, India has been asking for a reduction in tariffs [6] of textile exports from the current 12-16%. Through the course of these negotiations, a potential middle ground with lower tariffs is expected. Further, in the 2nd India-EU Trade and Technology Council Meeting [9] held on February 28, both sides have also agreed to address the challenges that Indian small and medium businesses face due to the obligations of CBAM.

In addition, EAM S. Jaishankar’s visit to UK and Ireland from March 4-9 has also been promising in context of boosting regional economic ties and delivering on the growth agenda. As the UK welcomes Indian investment deals worth more than £100 million [10], India and the UK have resumed negotiations on the India-UK FTA after a gap of 8 months. In addition, with a two-way trade at €16 billion [11], India and Ireland have agreed to establish a Joint Economic Commission in order to boost trade, investment, and technology linkages. It is interesting to note that India has already successfully concluded a comprehensive Trade and Economic Partnership with the EFTA countries, expected to come into force by the end of this year.

As India and Europe navigate an era of economic uncertainty and shifting geopolitical landscapes, their deepening economic partnership at such a time stands as a testament to their shared ambitions and strategic convergence. The ongoing trade negotiations, despite their complexities, reflect a mutual recognition of the potential for growth, investment, and technological cooperation. Although it could be a long journey to reach an agreement of mutual benefit, despite several setbacks, a successful India-EU and India-UK FTA is not out of reach. With the EU, UK, Ireland, and EFTA seeking greater resilience in their supply chains and India striving for a more prominent role in global trade, a robust and comprehensive India-Europe economic and trade partnership will be crucial in shaping the future of global geoeconomics.

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