Explained : Redefining India’s trade policy for new global era and Its Impact

As the celebrations of the 77th Republic Day continue, the special guests on the occasion, the European Union delegation jointly led by António Costa, President, European Council and Ursula von der Leyen, President, European Commission, and hosts India will soon get down to the serious end of the business, the signing of what has been called the ‘Mother of all trade deals’, the European Union-India Free Trade Agreement (FTA), also known as the Broad-based Trade and Investment Agreement (BTIA), that the two sides are set to sign on January 27, which marks the conclusion of nearly two decades of on and off negotiations.

Talks for this agreement, first launched in 2007, were repeatedly stalled, partly due to EU bloc’s negotiating mechanism, bureaucratic lethargy, ambitious standards including unpredictability in adding new issues in the negotiations, and partly due to India’s reluctance towards accepting EU as a reliable trading partner and also India’s over-dependence on the market in the United States. But after several rounds of slow-moving negotiations for over a decade and a half, in the last year or so, both have moved with precision, purpose and objective. In the annals of free trade deals, this agreement inked during the16^th EU-India Leaders’ Summit in New Delhi, will be remembered as one of the most comprehensive, forward looking and promising moments  in the EU-India strategic partnership.

By inviting Costa and von der Leyen to attend India’s 77th Republic Day celebration as chief guests, India’s diplomatic messaging is significant. Their presence underscores India’s recognition of the EU as a key stakeholder in global governance, trade, and security. It also highlights the evolution of 63 years of India-EU relations from a primarily economic engagement to a broader strategic partnership rooted in shared democratic values, multilateralism, and a rules-based international order.

The FTA between the two largest democracies is an extraordinary trade policy development. In the context of the pact, it is important to state that the change of heart in New Delhi and Brussels was necessitated due to US trade and tariff policies which pushed both for an expeditious conclusion of the negotiations. While possessing the potential to multiply the existing Euro 139.75 billion India-EU trade, the talks had long reflected differences in expectations from both sides. The India-EU FTA becomes India’s 19th trade agreement and one of the most consequential deals in the current global trade order.

Broader Strategic Significance

The agreement has come  against the backdrop of global economic uncertainty, changing geopolitics and highly fluid contemporary world order. For India, it is part of an effort to diversify its export markets and reduce dependence on any single trading partner. For the EU, the deal aligns with a renewed emphasis on building constructive bilateral trade relations and substantially reduce its dependency on China.

This trade agreement which European Commission President Ursula von der Leyen has called the “mother of all deals”, is highly consequential for the global order too, signalling shifts in economic power, challenging US-led trade norms and strengthening India’s strategic autonomy as a key Global South player. With this deal, India has offered EU a bridge to the dynamic Indo-Pacific and to the Global South, reinforcing Europe’s global reach at a time of introspection. For India, the EU offers investment, technology, and a powerful ally to bolster India’s rise on the world stage, all without compromising its strategic autonomy.

The China Factor

For about two decades, China has been a key factor shaping the India-US relationship, and today it is reshaping the EU-India economic and strategic relations. This is very much evident from the contours of EU-India FTA. The growing assertiveness of the People’s Republic of China and the United States shifting away from multilateralism and the increasing probability of break in the transatlantic alliance under the new Trump administration, has led the EU to look for new partners, and India suited its strategic need.

China remains a disruptive force and common concern for both Europe and India, primarily due to economic competition through its unfair trade, subsidies and a stranglehold on critical minerals. It has also been highly assertive in geopolitical matters, ranging from the Indo-Pacific and Taiwan to maritime security and it is said to pose security threats through disinformation, cyber and economic coercion, and finally it has divergent social values, such as respect for human rights. These concerns have pushed India-EU to build their ties to counterbalance China’s growing global influence.

2 billion people, one trade corridor

Yes, it has taken nearly 19 years of negotiation to conclude the deal but is important to understand that a deal which would touch the lives of 2 billion people in the two continents has to be made a win-win for  both with clear objectives and balancing interest of both sides. In addition to connecting two economic regions and a fast-expanding middle class in India, the potential impact extends well beyond tariff reductions, streamlined certifications, clearer Intellectual Property protections and improved digital trade rules and support long term cooperation in technology driven industries.

Together, the two markets represent more than a quarter of the world’s population and a combined GDP that rivals China’s. The deal is not just a bilateral trade agreement; it is set to reshape the rules of global trade. This trade deal is India’s most significant trade deals ever signed offering immense market access, boosting investment, and fostering cooperation in critical areas like tech and green energy. Currently, there are 6,000 European companies operating in India providing 3 million jobs directly. It is expected that this will increase three-fold in the next five years after the FTA comes into full force.

The EU is India’s second-largest trading partner, accounting for trade in goods worth EUR 139 billion, or 11.5 pc of India’s total trade. India is EU’s 9th largest trading partner, accounting for 2.4 pc of the EU’s total trade in goods in 2024, well behind the USA at 17.3 pc, China and 14.6 pc or the UK at 10.1 pc. Trade in goods between the EU and India has increased by almost 90 pc in the last decade. The EU’s imports from India comprise mainly machinery and appliances, chemicals, base metals, mineral products, gems and jewellery and textiles. The EU’s main exports to India consist of machinery and appliances, transport equipment and chemicals.

The agreement further opens the EU’s vast market to Indian goods as well as services like Information Technology and services, potentially boosting revenues and jobs. Further, it promises increased FDI for EU countries and access to advanced tech for India, particularly in semiconductors, AI, and clean tech. Above all, it builds on shared goals for resilient supply chains, digital innovation, and green transition, complementing initiatives like the India–Middle East–Europe Economic Corridor (IMEC). The EU will gain through reduced tariffs on autos, wines, dairy, and luxury goods.

In essence, the India-EU FTA aims to unlock vast economic potential, creating a partnership with global implications, but requires bridging significant gaps, especially concerning market liberalization and regulatory differences.

The agreement’s key impacts on the global order cannot be underestimated. India’s growing economy, which is now thefourth largest in the world, having pulled ahead of Japan and its strategic importance will challenge the new trade policies of the US. It may make Washington adopt partnership-based negotiation rather than pressure tactics.

Further, India’s assertive stance reinforces the growing influence of middle powers and the Global South shaping international trade rules, thus moving away from a unipolar system.

In the last 12 years, Indian government has introduced major economic and structural reforms including in ease of doing business in India which is helping the country increase its global influence in multilateral forums. India’s integration into the global economy has been accompanied by strong economic growth during the last decade, raising its prominence as an economic powerhouse.

The success of the FTA will largely depend upon Government-level alignment in both continents, and strong India–EU partnership in the context of the FTA will ultimately be built by businesses willing to collaborate at scale. Combining European innovation with Indian scale, European capital with Indian resilience, and European precision with Indian adaptability, will help unlock a value multiplier.

What is important to notice is that of late India’s FTA playbook has changed and now it looks beyond trade and tariff-led negotiations and more is focussed on deeper economic partnerships, embedding investment commitments, market access and supply chain integration. This is evident in the FTA signed by India with the European Free Trade Area in 2024 that aims for a predictable investment environment with non-discrimination, fair treatment, and dispute settlement. The specific “obligation to invest” seen in the EFTA deal reflects India’s push for tangible outcomes. In the EU India deal too, strong emphasis has been placed on investment and investment protection clause which signals India’s readiness to be a global trade player. Under the agreement, the EU countries will invest EUR 100 billion in the next 15 years.

This trade deal has strong flavour of India-UK FTA and with significant tariff reductions by India, it mirrors or even exceeds the UK-India deal’s liberalisation, especially in sectors like spirits, autos, and tech.

Agriculture excluded

Keeping in mind the farmers’ protests of three years ago, India has been walking carefully around agriculture in its trade deals (Photo: MIG)

Agriculture is a significant economic and political sector for all EU member states and is  considered a highly sensitive and challenging sector in the EU’s FTA negotiation with India. Though tiny in numbers, the farming lobby is powerful in many EU countries, and governments are often reluctant to make concessions that might anger domestic producers. We have seen how EU had to swallow its pride and was subjected to humiliation when EU-Mercosur trade deal was rejected by some EU countries under the pressure from farmer’s lobby. For India too, the agricultural sector plays a multifaceted role in the country’s economic development by contributing through various means, encompassing product contribution, factor contribution, employment contribution, and international trade in foreign exchange reserves of the nation. Nearly half of Indians depend on agriculture for their livelihood, and farmers make up a strong voting bloc that holds strong political clout. Back in 2021, farmer protests across the country had even forced Prime Minister Narendra Modi to withdraw agricultural reforms and apologise. India cannot afford another such protest and therefore agriculture has been kept out of the FTA purview.

As India had long asserted that “deal or no deal”, it will not open its agriculture or dairy sectors in the trade pact, and as such some sensitive agricultural items on both sides have been excluded from the pact.

Beyond trade and economics

Currently, Europe is navigating a period of profound strategic reorientation, driven by what strategic thinkers describe as a “polycrisis”—a convergence of security, economic, and demographic threats that challenge the continent’s stability and sovereignty. Characterised by major geopolitical shifts, the return of war in Europe in shape of Russia-Ukraine conflict, significant climate change impacts, economic challenges, all requiring major policy shifts to build a resilience and sustainable economy. In addition, driven by geopolitical turmoil, evolving regulatory frameworks, and rapid technological change, the global trade scenario undergoing a fundamental transformation, and to meet these challenges requires new policy strategies for Europe.

With collective security and defence architecture in Europe under serious threat, western hegemony collapsing under its own weight, as internal cohesion becomes weaker, Europe’s failure to accept harsher geopolitical reality, and the mission “United States of Europe” remaining a myth, EU is under no illusion that it can survive the serious structural turbulence alone. In the backdrop of these, and with the “marriage of economics” between India and EU in place, India as a reliable strategic partner can help Europe overcome these challenges of change.

The deal offers Europe opportunities in tapping critical human capital India possesses and welcoming orderly migration will be an important issue for EU to address as a follow up of the deal. The EU countries aging population faces human resource shortages in key sectors such as technology, healthcare, and hospitality. India’s large, young and skilled workforce is a significant resource. Mobility of Indian professionals in the EU will help it in addressing the challenges. An agreement on migration and mobility, such as those signed with Germany, Italy and France, will thus facilitate legal pathways for Indian professionals to work in all EU countries.

Decarbonisation Divide and Divergencies

From January 1, the EU’s Carbon Border Adjustment Mechanism (CABM) has come to effect. This issue has been a major roadblock in the conclusion of the FTA negotiations and finally both parties appear to have been able to address this through a sense of reciprocity and adjustment. India has long insisted on preserving differential World Trade Organisation rules for developing countries, rejecting the EU’s carbon border taxes on steel, aluminium and cement. Additionally, disagreements over automobile tariffs, data regulation, and governance, as well as regulatory harmonisation, had also continued to impede agreement. However, significant compromises have been made to see that the deal will not undermine domestic investment or allow unintended players, especially Chinese companies, to benefit through European route.

Ratification and Challenges

But signing the FTA is one thing and its ratification quite another as it is a highly complex process, often requiring approval at multiple levels of governance across member states of the EU.

The European Council representing the governments of the member states must approve the signing of the agreement, typically by a qualified majority vote. The deal then goes to the European Parliament whose consent is essential. The European Parliament must scrutinise the deal and hold a vote for the agreement to enter into force.

Member State Ratification (for ‘mixed’ agreements) is also required. If a trade deal is classified as a “mixed agreement” (meaning it covers areas where both the EU and individual member states have competence), it must also be ratified by each national parliament, and sometimes regional parliaments too, in all 27 member states. This final stage is often the longest and most unpredictable, as it allows domestic political issues to influence the process and gives any single parliament the power to veto the agreement. This multi-layered process ensures democratic scrutiny but also adds significant time and potential challenges to the final implementation of any trade deal.

Despite this, the process of ratification is likely to be smooth and swift because for the sheer need for both to make it happen. With India’s bilateral relations with all EU member states being “excellent”, and PM Modi’s “charm offensive” at work, it is expected that the deal will pass through the grinding ratification process in the next few months.