Trade, Power and Pragmatism: the EU-India Reset

The Free Trade Agreement (FTA) between India and the European Union (EU) was signed on 27 January 2026. This agreement covers 2 billion people and 25 percent of global GDP. The negotiations on this deal began about 20 years ago and had stalled because of differing positions of the two parties. Then, in 2025, negotiations were jump-started. 

Two external factors possibly caused this change of heart and speed. The first was, no doubt, President Trump’s subversion of the rules underpinning the multilateral trading system, with his whimsical tariffs. And the second factor was the inexorable rise of China as the world’s industrial powerhouse, with its geopolitical implications.   

In addition to these, there are the usual gains that an FTA will bring for both parties. For instance, India’s bound MFN (Most Favored Nation) tariff rates are very high—the average is above 50 percent for all products. 

The EU's average bound MFN rates are around 5 percent. In recent times, India has embarked on signing a slew of FTAs. The lowered tariff rates applicable to the signatories causes trade diversion from the non-signatories. 

This has happened, for instance, with automotive components, following India signing FTAs with Korea and Japan. Of course, it must also be remembered that high tariff rates do not always provide protection—notice the huge trade deficits that have accompanied India’s real appreciation in this century. 

Both the EU and the Indian economies are in the doldrums. India's GNP is USD 4 trillion, and the EU’s is USD 22 trillion. Notwithstanding the size of its economy, India needs a big push to achieve structural transformation. 

About 45 percent of India's labour force is employed in agriculture, producing about 18 percent of its GDP. The share of industry in the labour force (around 15 percent) has been constant for about two decades. 

The one recent success story for India was its software exports. Here AI is expected to make a big (negative) dent. In this bleak context, the free trade agreement is a welcome step forward, even though it may not be adequate (no single FTA can be), given the magnitude of the problem that India faces. 

The EU’s economy also needs support. It has fallen behind in the technological race. As highlighted in the Draghi Report, a large part of its industry has lost its competitive edge. As an example, recall the imminent threat posed to the EV manufacturers from Chinese imports. 

Under the FTA, the EU will eliminate tariffs on over 93 percent of tariff lines (91 percent in terms of value). India will eliminate tariffs on 86 percent of tariff lines (93 percent in terms of value)—about 50 percent of the tariff reduction will be effective when the agreement comes into force (after ratification by EU). 

India will remove high duties gradually on industrial products (which, on average, are above 16 percent). Pharmaceuticals, wines and olive oils from Europe with also see reduced tariffs. The EU car industry will benefit as India has agreed to slash car tariffs from 110 percent to 10 percent and create a quota-based access for 250, 000 cars annually in five years. 

India’s exports to EU will see duty elimination for important labour-intensive sectors, such as textiles, leather and footwear, tea, coffee, spices, sports goods, toys, gems and jewellery and certain marine products. The reduction in tariff rates will help India in capturing a part of the European market where Bangladesh, Sri Lanka, Pakistan and Vietnam had duty-free access. 

In services, the EU has opened up 144 sub-sectors and also facilitated mobility of workers and professionals from India. This is expected to help India diversify away from its dependence on the US market.  India, on its part, has opened up 102 sub-sectors, including in the financial, telecommunications and maritime domains. This marks a departure for India, since it has been reluctant to grant access in these areas.  

India has safeguarded what it considers sensitive sectors, such as dairy, cereals, poultry, soymeal, certain fruits and vegetables, etc. All Indian exports to the EU will have to respect the EU's strict health and food safety rules. The agreement seeks to provide enhanced commitment in services. There is also a pledge on intellectual property protection. 

On environmental matters the EU and India’s position are quite far apart. India has not signed the Methane Pledge, and the EU’s CBAM has come into effect. On CBAM no major concession has been offered, except to promise that any concessions offered to a third party would be extended to India. 

While EU Commission President Ursula von der Leyen’s description of the agreement, as “the mother of all deals” as a bit over the top, it is a step in the right direction.  

To a large extent, on geopolitical issues the parties have similar positions—with obvious disagreement on Ukraine, and on Russia, in general. The looming figure of China’s economic might and the wilful destruction of the rules-based order by Trump, might have brought India and the EU together to conclude the FTA, these problems still remain as they were.  

This deal will not dislodge China’s pre-eminent position in industry (and AI), nor be significant enough to pushback Trump. One can find faults with the nitty-gritty details of the FTA, but in the world that we inhabit, it is a definite step forward. Just compare this with the arm-twisted FTA that India had signed with the US.