The European Union (EU) and India have made history by signing a landmark free trade agreement (FTA) at the EU-India summit. It brings together the world’s fourth and second largest economies, accounting for about 25% of global GDP. Referred to as the ‘mother of all deals’ by the European Commission President Ursula von der Leyen, the agreement comes together after nearly two decades of negotiations. It creates a freer trade in goods and services between the EU and India and strengthens economic and political ties between them. What does this agreement mean for India?
Tariff Cuts Across Key Sectors
Considered one of the largest bilateral trade agreements, it has created a free trade zone that covers 2 billion people. The most significant aspect of the agreement is the reduction of tariffs. Europe will reduce tariffs for 99.5% of goods imported from India. Consequently, this will impact labour-intensive sectors such as textiles, engineering, gems and jewellery, leather and marine products, helping to create jobs across these industries. This is particularly significant for textile workers who have been hit by Trump’s increase of tariffs on Indian exports to 50%. Moreover, existing tariffs of 44% on machinery, 22% on chemicals, and 11% on pharmaceuticals will, for the most part, be eliminated. Furthermore, aircraft and spacecraft, plastics, iron, and steel will also benefit from near-total tariff reduction. Additionally, the deal will integrate India into the EU’s supply chain.
On the import side, India is set to reduce tariffs on 96.6% of European imports. As a result, exports of EU goods to India are expected to double by 2032. The main industry it is going to impact is the automobile industry. Currently, India places a high tax on imported cars, going up to 110%. This will reduce to 10% over the course of five years within a quota. Meanwhile, measures are placed to protect domestic automobile companies. The reduction will apply to cars costing over 15,000 euros, which is roughly ₹17 lakh. There is a cap on the number of vehicles that can be imported at this rate, which is 250,000 units per year. Furthermore, this relaxation will not apply to electric cars for the first five years, as a measure to protect India’s domestic players. Nevertheless, it will benefit EU car companies such as Volkswagen and BMW, and will also reduce the cost of luxury cars in India.
There is also a reduced tariff for European wine. The tariffs are down from 150% to 75% immediately and will eventually fall to 20%. Spirits have also been reduced to 40%. Olive oil tariffs will drop from 45% to zero over five years. Processed foods such as bread, chocolates and biscuits will see tariffs of up to 50% eliminated. In addition, improvements are expected in mobility and visa policies between the two regions, aimed at facilitating the movement of students, researchers and skilled professionals.
Challenges Posed by EU Regulations
There are still various concerns regarding European standards and certification, which could add pressure to Indian companies. This includes the Carbon Border Adjustment Mechanism (CBAM), a tax imposed by the EU on companies that manufacture outside its borders but sell products within the EU. This tax exists because manufacturers have to pay a carbon price in the EU. India is not exempt from this, although there is an expectation of more flexibility. Nevertheless, this tax will increase costs for Indian exporters, especially smaller entities.
A New Balance in Global Trade
The US remains the biggest overall trading partner for both India and the EU. However, Trump’s recent increase in tariffs has raised concerns about trade stability and economic uncertainty. In response, India and the EU are now cooperating to reduce their dependence on the US, developing long-term economic ties that provide a more stable alternative. Consequently, this will reduce the dependence on China for both parties and also diminish US power. Beyond these economic benefits, their increased cooperation on security and the environment marks a notable shift. Ultimately, this also positions India as a global player. Looking ahead, the agreement now faces a detailed technical and legal review by both sides, a process officials estimate will take at least 5–6 months. After the legal vetting is completed, the FTA can be formally signed. In India, it requires approval from the Union Cabinet, while on the European side approval must be granted by the European Parliament, a process that could take additional time.
