Dipak Kurmi
(The writer can be reached at dipakkurmiglpltd@gmail.com.)
After nearly two decades of intermittent, stop-start negotiations, India and the European Union have announced the conclusion of talks on a comprehensive free trade agreement, marking a pivotal moment in their economic relationship. The agreement is India’s ninth trade pact in four years and its nineteenth overall, in addition to six narrower preferential trade arrangements. That the deal has finally materialised owes less to the disappearance of long-standing differences and more to a shared recognition that geopolitical turbulence demands pragmatic compromise. Recent tariff shocks under Donald Trump, combined with mounting global dependence on China-centric supply chains, compelled both sides to recalibrate expectations and move toward an executable settlement rather than an ideal but unattainable one. In an era of fractured globalisation, realism has prevailed over rhetoric.
The scale of the agreement underscores its global significance. Together, India and the European Union account for 23 per cent of global GDP and 25 per cent of the world’s population, representing nearly 25 trillion dollars in economic output and close to two billion people. The partnership connects roughly one billion middle- and high-income consumers, making it one of the largest trade arrangements in the world. Bilateral trade in goods and services already stands at nearly 220 billion dollars, providing a robust foundation for expansion. The agreement thus builds on substantial commercial interdependence rather than seeking to create trade flows from scratch.
One reason the FTA holds promise is the complementary nature of the two economies. India predominantly exports labour-intensive products such as garments, footwear, and auto components, along with downstream manufacturing outputs including smartphones, generic pharmaceuticals, cut and polished diamonds, and processed fuels like diesel and aviation turbine fuel. The European Union, by contrast, specialises in capital- and technology-intensive goods, including machinery, aircraft, advanced electronic components, and medical devices, as well as critical industrial inputs such as rough diamonds and metal scrap. Because the two sides operate at different stages of the value chain, tariff liberalisation is likely to reduce costs and stimulate trade without triggering severe domestic industrial dislocation. This structural complementarity distinguishes the pact from agreements between direct competitors.
The FTA spans 24 chapters and addresses not only trade in goods but also services, intellectual property, digital trade, government procurement, environmental and labour standards, and data protection. On tariffs, the European Union will cut or eliminate duties on 98 per cent of Indian goods, although many existing tariffs are already modest. The most tangible gains lie in sectors such as garments, where duties average around 12 per cent, and footwear, where rates range between 8 and 15 per percent. Reductions here could enhance India’s competitiveness vis-à-vis Vietnam and Bangladesh, two formidable exporters in these segments. Additional beneficiaries include marine products, gems and jewellery, handicrafts, chemicals, and machinery, sectors that could see expanded market access under a more favourable tariff regime.
India, in turn, will reduce or remove tariffs on approximately 97 per cent of EU exports. Wine duties, currently as high as 150 per percent, will fall to between 20 and 30 per percent; spirits will decline to 40 per percent; beer to 50 per percent; and automobile tariffs, presently ranging from 100 to 125 per percent, will be reduced to 10 per cent for up to 250,000 vehicles. India will also move toward zero tariffs on numerous agri-food products, most processed foods, chemicals, machinery, electronics, and aircraft. These concessions reflect India’s willingness to open segments of its market in exchange for improved access abroad, although safeguards and quotas have been structured to mitigate potential shocks to sensitive industries.
Services represent a critical dimension of the agreement. India has secured commitments from the European Union in information technology and IT-enabled services, professional services, education, finance, tourism, construction, and other business sectors. The framework aims to ease short-term and temporary movement of professionals, a long-standing Indian priority. Yet the true impact will depend on the final legal text. Despite being India’s second-largest IT market, the EU has not absorbed Indian digital exports to their full potential. Regulatory requirements often compel Indian firms to establish local offices even for remote operations, and stringent minimum salary thresholds restrict mobility for Indian professionals. India is therefore seeking recognition as a data-secure country, which would reduce compliance burdens and enable Indian companies to compete on equal terms with counterparts from Japan and South Korea.
India’s gains in services will hinge on several unresolved issues, including adequate quotas for short-term visas, social security totalisation arrangements to prevent double contributions, and mutual recognition of professional qualifications. Both sides have agreed to facilitative frameworks addressing these concerns, but clarity awaits the publication of the final legal text. Notably, India has offered the European Union its most ambitious commitments in financial services within any trade agreement to date, signalling confidence in the maturity and resilience of its financial sector.
Notwithstanding these advances, significant risks shadow the agreement’s prospects. Chief among them is the European Union’s Carbon Border Adjustment Mechanism, which began imposing levies on imports based on embedded carbon emissions from January 1. Under the current design, EU goods could enter India duty-free following FTA implementation, while Indian exports to Europe would remain subject to carbon taxes. Although CBAM presently covers only six sectors, including steel and aluminium, it is structured to expand to all industrial goods in coming years, potentially eroding much of the tariff advantage secured through the FTA. The agreement offers little immediate relief on this front, and while the EU has promised to extend to India any flexibility granted to other countries, exporters already paying carbon levies derive limited benefit from such assurances.
A proposed cooperation platform in early 2026 and possible EU funding of 500 million euros for India’s green transition reflect broad intent but do not address the immediate, product-level costs facing exporters. For many Indian manufacturers, especially in carbon-intensive sectors, CBAM resembles a toll booth erected halfway across a bridge declared free. India may contemplate calibrated responses, including equal-value retaliation, though such measures would carry diplomatic and economic implications.
Regulatory hurdles constitute another area of concern. Indian medical devices and chemical exports often encounter high registration costs in the European Union. Agricultural exports such as basmati rice, spices, and tea are sometimes rejected due to extremely low pesticide residue thresholds, while marine products face additional testing requirements. Compliance with mechanisms like CBAM necessitates certification by EU-authorised auditors and extensive data reporting, raising administrative costs and delaying shipments. These burdens fall disproportionately on micro, small, and medium enterprises, which lack the scale to absorb prolonged regulatory friction.
Even beyond substantive issues, the risk of delayed ratification looms large. Approval requires endorsement by all 27 EU member states, a process that could extend beyond a year. The recent EU-Mercosur agreement, signed on January 17, 2026, has faced resistance from several European countries over concerns about farm imports and environmental standards, stalling provisional application. Although the India-EU FTA largely sidesteps contentious agricultural liberalisation, new objections could surface during national ratification debates, complicating timelines and investor expectations.
Despite these uncertainties, the India-European Union Free Trade Agreement signals a decisive shift toward pragmatic engagement in a fragmented global trade order. It reflects a shared understanding that diversification, resilience, and strategic alignment are now central to economic policy. The agreement’s promise is substantial, offering expanded market access, deeper services integration, and a framework for cooperation across digital, environmental, and regulatory domains. Yet its durability will depend on how effectively both sides manage carbon taxation, regulatory barriers, and political ratification.
In the final analysis, the FTA represents neither a triumphalist breakthrough nor a mere symbolic gesture. It is a calculated step toward stability in an uncertain world, rooted in complementarity and tempered by realism. If implemented with clarity and foresight, it could strengthen supply chains, encourage sustainable industrial practices, and reinforce the economic partnership between two major democratic actors. However, unresolved carbon levies and regulatory asymmetries remain formidable obstacles. The bridge has been built, but whether traffic flows freely will depend on the tolls imposed along the way.