The India EU FTA, A Giant Leap, Awaiting the Crucial Step of Investment Protection

The India EU FTA, A Giant Leap, Awaiting the Crucial Step of Investment Protection

The recent inking of the India-European Union Free Trade Agreement (FTA) marks a watershed moment in international economic diplomacy, a culmination of over two decades of intermittent and often fraught negotiation. Hailed as the “mother of all free trade agreements,” its scale is undeniably historic, promising to reshape trade flows between two economic giants representing a quarter of the world’s GDP. It opens European markets to a swath of Indian goods and professionals with unprecedented breadth. However, a sober analysis reveals that this celebrated pact, while a monumental achievement, represents only half the journey. For the agreement to catalyze the transformative economic shift India aspires to—one that generates mass employment and elevates its global manufacturing stature—it must be urgently complemented by a robust, credible, and comprehensive Investment Protection Agreement (IPA). Without this, the FTA risks becoming a highway for exports without fostering the domestic industrial ecosystem needed to sustainably drive them.

The Geopolitical Catalyst and the Scope of the Deal

The surprising alacrity with which the final hurdles were cleared can be attributed, in no small part, to the shifting sands of global geopolitics. As the article notes, the unilateral and transactional approach of the previous US administration under Donald Trump served as a profound wake-up call for Brussels. Trump’s ambivalence towards traditional alliances like NATO and his overtures for acquisitions like Greenland underscored a volatile American commitment to its European partners. Simultaneously, India faced its own challenges with US trade policy, often perceived as exclusionary and based on spurious grounds. This shared experience of navigating an unpredictable superpower created a unique convergence of strategic interests.

The India-EU FTA, therefore, is more than an economic compact; it is a potent piece of geopolitical signalling. It announces the formation of a new democratic axis, a strategic partnership between the world’s largest democracy and a bloc of democratic nations, seeking to diversify dependencies and build a more multipolar, rules-based trading system. The accompanying defence and security partnership further solidifies this, moving the relationship beyond commerce to shared concerns about regional stability and secure supply chains. For India, gaining preferential access to its largest goods trading partner, with which it already enjoys a surplus, is an undeniable victory. It promises cheaper imports for Indian consumers, from luxury cars to fine spirits, and, more importantly, expanded markets for employment-intensive sectors like textiles, leather, gems & jewellery, chemicals, and toys.

The Glaring Gap: Investment Protection as the Missing Keystone

Yet, amidst the fanfare, the agreement’s structural limitation is stark. It excels at addressing the flow of goods and services but remains critically silent on the protection of capital. This omission is not incidental but stems from a contentious history. In 2016, India unilaterally terminated the majority of its existing Bilateral Investment Treaties (BITs), citing a need to overhaul its model treaty to balance investor rights with the state’s regulatory sovereignty. While a new model BIT was introduced, the process of renegotiating treaties, including one with the EU, has been painstakingly slow, languishing since 2022.

This gap is not a minor technicality; it is the chasm that could undermine the entire FTA’s transformative potential. The fundamental promise of an FTA is to create an integrated economic space. While the FTA lowers tariffs for Indian exports to Europe, its full benefit is realized when European companies are incentivized to establish manufacturing bases, R&D centers, and technology hubs within India. This onshoring of capital, technology, and managerial expertise is what truly embeds a nation into global value chains, creates high-quality jobs, and spurts productivity growth.

However, the current Indian policy and judicial landscape is perceived by many foreign investors as unpredictably capricious. The article highlights several cautionary tales: the Vodafone retrospective tax saga, a long-running saga of arbitrary taxation; the Supreme Court’s ruling in the Tiger Global case, which challenged the very premise of foreign investor rights under certain structures; and the often-opaque imposition of Quality Control Orders (QCOs) that can suddenly disrupt supply chains. These incidents, among others, have fostered a perception of regulatory and judicial unpredictability that no FTA on tariffs can erase.

The Symptom: Domestic Investment Ennui and Surging Outbound Capital

The most damning evidence of this trust deficit is not from foreign investors alone, but from India’s own business community. Despite persistent appeals from the highest levels of government for private sector investment to fuel the “Make in India” dream, domestic private capital expenditure has been hesitant, marked by what the article aptly terms “investment ennui.” Businesses, while profitable, seem reluctant to commit large-scale, long-term capital to greenfield projects in manufacturing.

In stark contrast, Indian companies are demonstrating remarkable confidence and ambition outside the country’s borders. Outbound foreign direct investment (FDI) and merger & acquisition (M&A) activity have been surging, growing 68% year-on-year in FY25. This capital is not merely fleeing to tax havens but is being strategically deployed to acquire capabilities, brands, and market access globally. Tata Steel’s acquisition of Iveco’s commercial vehicle business, Zydus’s stake in France’s Amplitude Surgical, Bharti’s investment in UK’s BT Group, and the Aditya Birla Group’s plans for a Texas R&D center are all testaments to a clear corporate strategy: if the domestic ecosystem is perceived as challenging for high-value, globally integrated operations, Indian firms will seek those opportunities abroad.

This creates a paradoxical and unsustainable dynamic. The India-EU FTA is designed to make India a manufacturing hub, yet India’s own capital is flowing out to establish and integrate into manufacturing and innovation hubs elsewhere. An IPA with the EU would be a powerful tool to reverse this flow. By providing European investors guarantees against unfair expropriation, assurances of fair and equitable treatment, and access to neutral international arbitration, it would mitigate perceived political and regulatory risks. This would make the prospect of setting up a factory in Tamil Nadu to serve both the Indian and tariff-free EU market significantly more attractive than it is today.

Building a Complete Partnership: How an IPA Complements the FTA

An Investment Protection Agreement is not a standalone document; it is the essential counterpart to the FTA, creating a virtuous cycle of trade and investment.

1. From Market Access to Local Presence: The FTA gives European companies a reason to sell to India and buy from it. An IPA gives them the confidence to produce in India. A German auto component manufacturer is more likely to build a state-of-the-art plant in Pune if it knows its investment is legally shielded from arbitrary state action, thereby using India as a base to serve the entire region.

2. Technology Transfer and Deep Integration: High-tech collaboration in areas like green hydrogen, semiconductors, and AI—envisioned in the FTA—requires deep, equity-based partnerships and joint ventures. These involve substantial, sunk-cost investments. An IPA provides the security framework that makes such risky, long-gestation technology transfers feasible.

3. Correcting the Asymmetry: Currently, the FTA primarily benefits Indian exporters of goods and services. An IPA would balance the ledger by actively encouraging European investors, leading to a more balanced and sustainable economic relationship built on two-way flows of goods, services, and capital.

4. A Signal to the Global Community: A high-standard IPA with a bloc as rigorous as the EU would serve as a powerful signal to global investors worldwide. It would demonstrate India’s genuine commitment to the rule of law, regulatory consistency, and being “open for business” in the most concrete terms possible, potentially attracting capital from other jurisdictions as well.

The Path Forward: Negotiating a Modern, Balanced IPA

The challenge for Indian negotiators is to craft an IPA that protects investors without shackling the state’s legitimate right to regulate in the public interest on issues like environmental protection, public health, or national security. The 2016 model BIT was an attempt to strike this balance, but its provisions were seen by many investors as overly tilted towards the state. The EU, with its own sophisticated legal framework, will demand robust protections.

Finding this middle ground is the critical next step. It requires political will and a nuanced understanding that sovereign regulatory power and credible investor protection are not zero-sum concepts but are, in fact, mutually reinforcing in attracting the kind of quality, long-term investment India needs.

Conclusion: Completing the Architecture for a Century of Growth

The India-EU FTA is a monumental diplomatic and economic achievement. It solidifies a crucial strategic partnership and provides immediate avenues for trade growth. However, to view it as an endpoint is to mistake a foundation for the entire edifice. The agreement unlocks a door, but an Investment Protection Agreement is the bridge that guides capital across the threshold to build factories, laboratories, and lasting partnerships within India.

Without this bridge, the risk is that the FTA becomes a conduit that primarily facilitates Indian exports and, paradoxically, accelerates the outflow of Indian capital seeking safer havens abroad. With it, India can genuinely hope to become the trusted production and innovation partner of Europe, anchoring global supply chains, creating millions of jobs, and fulfilling the transformative potential that this “mother of all deals” promises. The message is clear: the historic FTA has been inked. Now, India and the EU must, with equal urgency and purpose, seal the guarantee.

Q&A on the India-EU FTA and Investment Protection

Q1: Why is the India-EU FTA considered a geopolitical achievement, not just an economic one?
A1: The FTA emerged in a context of global strategic realignment. Shared experiences with an unpredictable US foreign policy under the previous administration pushed both India and the EU to diversify their economic and strategic partnerships. The deal, coupled with a defence pact, signals the formation of a strong democratic axis aimed at reducing over-dependence on any single power and promoting a stable, multipolar world order based on rules. It is as much a statement of shared values as it is about trade flows.

Q2: What are the immediate economic benefits expected from the FTA for India?
A2: The immediate benefits are largely centered on improved market access. Key employment-intensive Indian export sectors like textiles, leather, gems & jewellery, chemicals, and toys will gain preferential, tariff-free access to the vast EU market of over 450 million consumers. This can boost exports, support existing industries, and create jobs. Indian consumers will also benefit from access to cheaper European imports like wines, spirits, and luxury goods.

Q3: What is the critical missing element that could limit the FTA’s long-term impact?
A3: The critical missing element is a robust Bilateral Investment Treaty (BIT) or Investment Protection Agreement (IPA) between India and the EU. The FTA facilitates the movement of goods and services but does not adequately address the protection of foreign capital. The absence of strong legal safeguards against arbitrary regulatory action or unfair treatment discourages the very European investment in manufacturing and technology within India that is needed to make the FTA truly transformative.

Q4: How does the trend of surging Indian outbound investment highlight a domestic problem?
A4: While domestic private investment remains hesitant (“investment ennui”), Indian companies are aggressively investing overseas in acquisitions and setting up global bases (e.g., Tata Steel in Italy, Aditya Birla in the USA). This paradox suggests that Indian capital itself finds the domestic ecosystem less attractive for certain high-value, globally integrated activities due to perceived regulatory and judicial uncertainties. This outward flow, while showcasing corporate ambition, undermines the goal of making India a global manufacturing hub.

Q5: What would a successful India-EU Investment Protection Agreement achieve?
A5: A successful IPA would:

• Boost FDI Inflows: Give European firms the confidence to make long-term, fixed-asset investments in Indian manufacturing and R&D.

• Enable Technology Transfer: Facilitate deep-tech collaborations by securing the intellectual property and capital involved.

• Balance the Relationship: Complement the FTA’s focus on Indian exports by encouraging inward EU investment, creating a more balanced economic partnership.

• Send a Global Signal: Act as a gold-standard endorsement of India’s improved investment climate, attracting capital from other countries.

• Create Domestic Jobs: Ultimately, by fostering “make in India” for global and domestic markets, it would generate the high-quality, sustainable employment that is a central goal of the entire partnership.