By Dr. Krzysztof M. Zalewski
(Boym Institute & Centre for International Relations, Poland)
Negotiations on a free trade agreement (FTA) between the European Union and India have been ongoing for 18 years, with breaks. Despite the ongoing difficulties, for geo-economic reasons its finalisation now seems more likely than ever before. It will probably be the largest free trade area in the world next to RCEP.
Given the scale of Indian economy, from Poland’s perspective this agreement creates both enormous challenges and great opportunities. The impact of this trade agreement on the economy depends on the negotiated detailed solutions and the ability of the Polish administration to cooperate with business. The Polish debate on this FTA should not be dominated by defensive interests.
“ The EU-India free trade agreement would be the largest of its kind in the world (…). Timing and determination count, and this partnership comes at the right time for both sides. That is why we have agreed with Prime Minister Modi that we will strive to achieve it this year”, said the President of the European Commission, Ursulu van der Leyen in New Delhi during an unusual foreign visit of the entire College of commissioners in February. She was echoed by Prime Minister Modi: We have prepared a plan of cooperation in trade, technology, investment, innovation, green growth, security, skills and mobility. We have instructed our teams to conclude a mutual technology, investment, innovation, green growth, security, skills and mobility. We have instructed our teams to conclude a mutually beneficial bilateral free trade agreement by the end of this year.”
Will the two major economies – currently the world’s second and fifth largest – be connected by an FTA? The history of the EU-India comprehensive trade agreement is not very encouraging. It has often seemed that an agreement was within reach, but in the end it didn’t happen.
Let us recall that the work on the joint political declaration of 1993 and cooperation agreement of 1994 was accompanied by the idea of deepening trade relations between New Delhi and the bloc countries. When in 2004 India and the EU became “strategic partners”, both sides expressed hopes for the imminent conclusion of a free trade agreement. However, the negotiations started in 2007 were suspended in 2013. The reason was the difficult to overcome differences in interest in sectors like automotive, agriculture and food production or pharmaceutical industry.
There were fears of too deep economic and social disruptions caused by the agreement. Reducing tariffs of more than 100% on groups of goods such as dairy products, vegetables, fruits, sugar and confectionery products could cause a collapse in production and a crisis in the industries. Both the EU and India heavily subsidised their own agricultural production, perceiving it as an inalienable component of food security. In turn, different interests and rules regarding intellectual property in the pharmaceutical market caused, on the one hand, European fear of a flood of cheap Indian generic drugs, and on the subcontinent – fear of a practice called ever -greening, i.e. maintaining drug patents by European companies by introducing minimal changes to them.
After eight years, in 2021, a will was announced to return to negotiations, which started in 2022. At that time, the interest in India on the European side was mainly motivated by the intensifying competition with China. New Delhi, on the other hand, had ambitions to take advantage of the de-risking policy promoted by EU institutions, i.e. reducing EU’s dependence on imports from China. At the corporate level, this principle was called” China plus one “. In principle, large international corporations should not base their extensive supply chains solely on the Middle Kingdom, having an alternative place of production and sourcing of raw materials. India seemed to be the ideal partner for this.
But for over two years, there was a lack of political will to overcome obstacles old and new. Although negotiating teams met, the scant information about the talks suggested no breakthrough had been achieved. EC officials involved in the negotiations complained that Indian delegations lacked information or authority to make binding decisions.
This doesn’t mean that trade has not flourished. Quite the opposite – over the past decade, trade has almost doubled, both in goods and in services. As per EC, EU remains India’s largest trading partner, accounting for trade in goods worth €124 billion in 2023, or 12.2% of India’s total trade, ahead of the US (10.8%) and China (10.5%). India has a surplus in its relations with EU every year. Exports to EU and the US each accounted for 17% of India’s total exports.
Although India is only the EU’s ninth-largest trading partner, accounting for just over 2% of total EU goods trade in 2023, its position has been steadily growing over the past two decades. Trade in goods has almost doubled in the decade since the FTA negotiations were suspended, despite the pandemic crisis (2020-21). Trade in services has grown even faster, almost doubling in 2020-23 from €30.4 billion to €59.7 billion. Direct investment has been growing at a slightly slower pace, rising by just over 30% in 2019-22 to €108 billion.
It is precisely the rapidly growing trade in services and goods and the solid value of investments that make both sides seem inclined to quickly conclude a trade and investment agreement to maintain the existing trend. Trade and investment need a stable legal basis, providing certainty of turnover.
More important factors that speak in favor of quickly concluding an agreement that had previously been impossible for decades. Firstly, India-EU ties, especially in bilateral relations with individual Member States, have gained a strategic dimension not only in terms of declared plans and values, but in terms of interests. Brussels and New Delhi are currently united by the desire to deepen cooperation in trade and technology, security and defence issues, but also in the broad sense of global connectivity, i.e. building multidimensional infrastructural, economic and business connections.
Secondly, both EU and India are trying to acquire new trading partners in the face of the unpredictable policy of the US administration. The level of additional US import tariffs announced on 2 April – 27% on Indian products and 20% on EU goods – in both cases surprised business analysts. Since the US remains the leading trading partner for both the European “ 27” and India, such high tariffs could cause economic disruption and crisis. Bilateral FTA may therefore be a way to escape forward.
Third, even before the new U.S. tariffs were announced, India’s economic growth, still the fastest among the world’s major economies, appeared to be slowing. It fell to 5.4% in the fourth quarter of 2024, well below the RBI’s expectations of 6.8% annual growth. Direct investment data was also disappointing, with Vietnam and Malaysia benefiting much more effectively from the policy of relocating some production from China.
In turn, on the Old Continent, most EU economies are stagnating, and the continent’s largest economy, Germany, is in its third year of recession. For both partners, an FTA would be a way to stimulate economic growth.
Fourthly, why the current plan to speed up negotiations may succeed is the clear change in attitudes among Indian elites towards international trade and FTAs. Until now, New Delhi has been haunted by the shadow of Jawaharlal Nehru, India’s long-time post-war prime minister, who, because of India’s unfavourable modern experience in relations with the West, saw international trade as a threat of colonisation.
After a period of liberalization that began in 1991, tariffs have been rising again since at least the middle of the last decade. The Modi government has sought liberal economic reforms within the country since coming to power, but it has also believed that a combination of higher tariffs and investment incentives should attract manufacturing.
But New Delhi has changed its attitude toward trade agreements in recent years, recognizing their potential for growth and modernization and exposing Indian companies to external competition. Concerns about domination by a rival from across the northern border, China, prevented India from joining RCEP in 2020, an agreement that liberalizes trade between the 10 nations of Southeast Asia (ASEAN) and its five regional trading partners, South Korea, Japan, China, Australia and New Zealand .
However, India has sought trade agreements with smaller entities on a bilateral basis. In 2022, an agreement was signed with the UAE and with Australia a few months later. Negotiations on pact with UK were resumed. The pressure to quickly conclude an agreement with EU is therefore part of a broader trend among the Indian elite: after cades of skepticism, the Indian subcontinent is now dominated by faith in its own strength and the ability of domestic entrepreneurs to cope with external competition.
The preparations for this incomparably larger agreement also have a practical dimension. During Raisina Dialogue conference in New Delhi one could sense a certain optimism among hosts and European guests regarding the acceleration of talks and the prioritisation of them by the leadership of the EC and Indian government. Moreover, the ministers of the member states – with the exception of Hungary – presented an exceptionally coherent position not only on the issue of relations with India, but also on global challenges.
Teams on both sides have been strengthened, and both sides at India’s most important geopolitical conference have publicly expressed hope that the talks will be concluded by the end of this year. The decision in 2022 to negotiate on three separate platforms, namely a free trade agreement, an investment protection agreement and an agreement on geographical indications (GI) for food products , has reduced the risk that a blockade on any one of them will lead to the collapse of the whole
This does not mean, however, that the conclusion of the agreement is certain. It may be delayed or permanently blocked by the relations of the EU with its external partners or by internal factors in India and the Union. The biggest risk factor in trade issues remains the unpredictable policy of US administration. Given the importance of the economic partnership between both EU and US and US and India, it is possible that the current hectic negotiations with Washington will drive Brussels and New Delhi apart.
India has adopted a different negotiation strategy than Europe. While EU is currently focused on finding an internal compromise on tariffs on American goods, subsequent Indian trade missions are focusing on creating conditions for signing a trade agreement with US too. Before Modi’s visit to Washington in February, tariffs on American bourbon and motors were reduced. During the visit, the Indian side declared its willingness to purchase more American gas (LNG), crude oil and arms. There is hope in New Delhi that a trade agreement on trade in goods with the US will be concluded by autumn 2025, the goal being to achieve trade exchange of $500 billion in 2030, from $ 210 billion last year (an average of 15% annually).
Indian negotiators hope that while they will likely not be able to avoid an increase in U.S. tariffs on products from the subcontinent, the tariffs will be lower than those on goods from other parts of the world, giving Indian products a comparative advantage in US market. However, the parallel talks with Washington could cast a shadow over EU-India negotiations, especially since it may not be in U.S. interest to conclude such an agreement between the two American trading partners any time soon.— INFA