The Conditional Victory, Unpacking the Promise and Peril of the India-EU Free Trade Agreement

The Conditional Victory, Unpacking the Promise and Peril of the India-EU Free Trade Agreement

The long-awaited conclusion of a Free Trade Agreement (FTA) between India and the European Union stands as a landmark moment in the annals of global trade. After two decades of fits, starts, and political recalibrations, the two economic giants have bridged profound differences to forge a pact that is both a commercial breakthrough and a geopolitical statement. On paper, it is a conditional win of historic proportions, promising to unlock trade flows, diversify supply chains, and cement a strategic partnership between the world’s largest democracy and its most integrated economic bloc. Yet, as Senior Fellow Saurabh Bandyopadhyay incisively argues, this hard-won victory is precisely that—conditional. Its ultimate legacy will not be inscribed by the signing ceremony but by the arduous, domestically driven process of managing adjustment costs, navigating regulatory chasms, and ensuring that the winds of liberalization do not uproot vulnerable sectors while only elevating a select few. The India-EU FTA is less a finish line and more a starting pistol for a complex race towards resilient, inclusive growth.

The Macroeconomic Promise: Rebalancing a Lopsided Partnership

The fundamental rationale for the agreement is rooted in a stark economic asymmetry. The EU is India’s second-largest trading partner, with bilateral goods and services trade exceeding €120 billion annually. However, this figure represents less than 3% of the EU’s total external trade, underscoring the untapped potential. The imbalance is further reflected in tariff walls: India’s average applied tariffs on many industrial goods—particularly automobiles, wines, and capital goods—remain several times higher than those faced by Indian exporters in Europe.

The FTA seeks to recalibrate this relationship through phased, reciprocal liberalization. For the European Union, the prize is clear: improved, predictable access to India’s vast and rapidly growing consumer market of 1.4 billion people. At a time of global trade fragmentation and supply chain anxiety, India offers a democratic, large-scale alternative for diversification, especially as companies look to de-risk from over-concentration in certain geographies. Sectors like luxury automobiles (€10-12bn in exports), industrial machinery (€9-10bn), and specialty chemicals stand to gain significantly from lower tariffs.

For India, the gains are multifaceted and extend beyond simple export arithmetic. Key export sectors poised for a boost include:

• Engineering Goods & Machinery (€18-20bn): A sector where India has developed competitive scale.

• Gems & Jewellery (€15-17bn): A traditional strength that could see higher value addition.

• Textiles & Apparel (€8-9bn): Where preferential access could help counter competition from Bangladesh and Vietnam within the EU market.

• Services: A critical offensive interest for India, with potential gains in IT, legal, accounting, and nursing through mutual recognition agreements and easier mobility.

Beyond exports, the agreement is a powerful signal to attract higher-quality European foreign direct investment (FDI). By locking in stable, transparent rules, the FTA can catalyze investment in manufacturing (aligning with India’s Production Linked Incentive schemes), green technology, and R&D, transferring not just capital but also technology and managerial expertise. The political realism embedded in the deal is evident in the careful protection of sensitive sectors like agriculture and dairy, acknowledging the socio-political imperatives in India and the defensive interests of certain EU member states.

The Adjustment Conundrum: The Inevitable Pain of Liberalization

The euphoria surrounding market access must be tempered by the sobering reality that trade liberalization is inherently “distribution-neutral.” While aggregate economic models predict net positive gains, these gains are not evenly distributed. The FTA will create clear winners—competitive exporters, consumers with access to cheaper and higher-quality imported goods, and firms integrated into global supply chains. However, it will also impose acute adjustment costs on specific domestic industries that have matured under decades of high tariff protection.

This adjustment pressure will be most intensely felt in sectors like automobiles and select capital goods manufacturing. Smaller and medium enterprises (SMEs) and less productive firms in these segments, which have relied on tariff walls rather than innovation or efficiency to compete, face an existential challenge. A sudden influx of European automobiles—renowned for quality, safety, and brand prestige—could disrupt the market share of domestic players. The “pace and timing of tariff reductions,” as Bandyopadhyay notes, are therefore as critical as the cuts themselves. A carefully staged phase-in period is essential to provide a runway for domestic firms to adapt, invest in upgrading, and potentially form strategic partnerships or joint ventures with European entrants.

The political sustainability of the FTA hinges entirely on how these dislocations are managed. If swathes of SMEs face closure and significant job losses materialize in specific industrial clusters without adequate state support, the “politics of openness can quickly become contentious.” Populist backlash could undermine the agreement, leading to calls for renegotiation or non-tariff barriers. Therefore, the FTA cannot exist in a policy vacuum. It must be accompanied by a robust domestic “adjustment policy package” that includes:

• Access to Finance: Easy credit and restructuring facilities for firms seeking to modernize.

• Skilling & Reskilling Initiatives: Programs to equip workers in affected sectors with new, relevant skills for emerging industries.

• Ease of Compliance: Drastic simplification of domestic business regulations to help firms reduce costs and become globally competitive.

• Facilitation of Partnerships: Government-led platforms to connect vulnerable domestic firms with European technology and investment partners.

The Regulatory Fault Line: Sustainability, CBAM, and the “Brussels Effect”

Perhaps the most complex long-term challenge lies in the realm of regulatory standards. The EU has successfully embedded its normative agenda into the FTA, with strong commitments on sustainability, environmental protection, and labor standards. This reflects the “Brussels Effect”—the EU’s power to externalize its regulations through market mechanisms.

The most potent instrument in this regard is the Carbon Border Adjustment Mechanism (CBAM). While framed as a climate policy to prevent “carbon leakage,” CBAM functions as a de facto green tariff. It will impose a carbon cost on imports of carbon-intensive goods like steel, aluminium, cement, and fertilizers into the EU. For many Indian exporters in these sectors, this represents a formidable new trade barrier, as India’s industrial carbon intensity is currently higher than the EU average due to a coal-dependent energy mix.

The FTA’s success, therefore, is inextricably linked to India’s green industrial transition. The agreement’s provisions for technical cooperation and climate finance are not peripheral “add-ons” but central to its viability. The EU must partner genuinely to facilitate technology transfer and finance for decarbonization in Indian industry. Simultaneously, India must aggressively accelerate its shift to renewable energy, green hydrogen, and energy-efficient production processes. Without this, the competitive advantage gained from tariff reductions could be nullified by the costs of complying with CBAM and other sustainability mandates, leaving Indian exporters in a perilous position.

The Strategic Dimension: An Alliance for a Fragmented World

Beyond balance sheets and tariffs, the FTA carries immense geostrategic weight. In an era of renewed great power competition, supply chain weaponization, and economic blocs, both India and the EU are pursuing strategic autonomy through trusted partnerships. For Europe, India represents a democratic, fast-growing counterweight in the Indo-Pacific, a region critical to global trade and security. Deepening ties with India helps the EU diversify its economic dependencies and strengthen a rules-based order in Asia.

For India, the agreement is a masterstroke of multi-alignment. It deepens economic integration with a powerful Western bloc without entering a formal military alliance, preserving India’s strategic independence. It reduces over-dependence on any single market (a lesson from tensions with China and trade frictions with the US) and enhances India’s bargaining power in all multilateral forums. In this sense, the FTA is a form of “strategic insurance” for both parties against global volatility and coercion.

Conclusion: A Victory Contingent on Domestic Reform

So, is the India-EU FTA a win-win? As Bandyopadhyay concludes, the answer is a conditional yes. The agreement has unlocked a door of monumental opportunity. It promises higher trade, better investment, stronger supply chains, and a fortified democratic alliance.

However, the door does not walk people through. The conditional nature of this victory cannot be overstated. The FTA’s true test will be fought on the domestic battlegrounds of Indian and European political economies.

For India, the imperative is to pair the FTA with a relentless focus on:

1. Industrial Upgradation: Helping firms, especially SMEs, climb the quality and productivity ladder.

2. Social Safety Nets & Skilling: Protecting workers in transition and building a future-ready workforce.

3. Green Transition: Making decarbonization a central pillar of industrial policy to meet EU standards.

4. Logistics & Infrastructure: Reducing the crippling domestic costs that erode export competitiveness.

If India executes this complementary agenda, the FTA can catalyze a transformative phase of broad-based, high-quality growth, moving the economy up the global value chain. If it fails—if adjustment costs are ignored, if the green transition is sluggish, if support for firms is lacking—the benefits will accrue narrowly to a few large exporters and multinationals, while political opposition swells and the strategic promise fades.

The India-EU FTA is a formidable framework, but its pages are still blank. The story of its success or failure will be written by the choices made in New Delhi, Brussels, and countless factory floors and government offices in the years to come.

Q&A: The India-EU Free Trade Agreement

Q1: What is the core economic asymmetry the India-EU FTA seeks to address?

A1: The asymmetry is twofold. First, while the EU is India’s 2nd largest trading partner (€120bn+ trade), India accounts for less than 3% of the EU’s total external trade, indicating vast untapped potential. Second, there is a tariff imbalance: India’s average applied tariffs on many EU industrial goods (like automobiles, wines, machinery) are significantly higher than the tariffs Indian exports face in the EU. The FTA aims to rebalance this through phased, reciprocal tariff reductions, giving Indian exporters better access while allowing European goods more entry into the Indian market.

Q2: Why will the FTA create “adjustment costs,” and which sectors in India are most vulnerable?

A2: Trade liberalization is “distribution-neutral,” meaning it creates winners and losers. Adjustment costs refer to the dislocation faced by domestic industries that have been protected by high tariffs and are not globally competitive. In India, the most vulnerable sectors are automobiles and select capital goods manufacturing, where smaller and less productive firms have relied on tariff walls. They will face stiff competition from high-quality, often cheaper, European imports. If these firms cannot adapt quickly, they risk losing market share, leading to potential job losses and business closures, which is the primary source of political risk surrounding the deal.

Q3: What is the Carbon Border Adjustment Mechanism (CBAM), and why is it a major challenge within the FTA framework?

A3: CBAM is an EU regulation that imposes a carbon price on imports of certain carbon-intensive goods (like steel, aluminium, cement, fertilizers). It is designed to prevent “carbon leakage” (companies moving production to regions with weaker climate rules) and level the playing field for EU industries facing carbon costs. For India, it acts as a de facto green trade barrier. Since India’s industrial carbon intensity is currently higher (due to coal-based energy), Indian exports in these sectors will become less competitive unless they rapidly decarbonize. The FTA’s success thus depends on parallel cooperation and finance to help Indian industry transition to cleaner production to avoid being penalized by CBAM.

Q4: Beyond economics, what is the strategic significance of this agreement for both India and the EU?

A4: Strategically, the FTA is a democratic alignment in a fragmenting world. For the EU, it deepens ties with a major, fast-growing democratic power in the Indo-Pacific, helping diversify supply chains away from geopolitical hotspots and strengthening a rules-based order. For India, it is a pillar of its multi-alignment strategy, reducing economic over-dependence on any single region (like China or the US) and boosting its global negotiating leverage. It’s a form of “strategic insurance,” cementing a partnership based on shared democratic values amid global uncertainty and great power competition.

Q5: What does the author mean by calling the FTA a “conditional win,” and what conditions must be met for it to succeed?

A5: A “conditional win” means the agreement creates the potential for major gains, but realizing them depends on critical follow-through actions. The conditions for success are primarily domestic:

• For India: It must implement a robust adjustment policy—supporting SMEs with finance and skilling, accelerating the green industrial transition to meet EU standards, and improving logistics and ease of doing business. Without this, benefits will be narrow and political backlash will grow.

• For the EU: It must provide genuine technical and financial cooperation to help Indian industry decarbonize and meet high regulatory standards, ensuring its sustainability rules don’t become insurmountable barriers.

The FTA opens the door, but walking through it requires difficult domestic reforms and cooperative implementation. The victory is conditional on this hard work.