By Amit Kapoor, Chair, Institute for Competitiveness
The India-European Union (EU) free trade agreement (FTA) lands at a moment when trade policy is doing double duty—it is still, in the classic sense, about shifting relative prices to reallocate resources towards comparative advantage, but it is also increasingly an instrument of geopolitical risk management in a fragmented world economy. This dual character is visible in both the design of the pact and the rhetoric around the “mother of all deals”. The scale of the deal gives it economic heft and geopolitical meaning, aligning two “strategic autonomy” projects determined to resist a binary choice between Washington and Beijing.
On the economic front, the agreement is striking in the breadth of its tariff liberalisation. Once partial liberalisation is taken into account, it would cover 99.3% of EU imports and 96.6% of Indian imports by value, making it one of the most ambitious trade agreements India has concluded. For India, it implies a gradual dismantling of tariff structures that have long served as an instrument of industrial policy. Lowering these barriers does more than expand market access for European exporters—it reshapes the incentives facing multinational firms when deciding where to locate production and integrate supply chains. In practical terms, the removal of steep import duties in sectors such as automobiles, chemicals, and machinery is expected to reduce the tariff burden on EU exporters by around €4 billion annually once the FTA is fully implemented.
The sectoral details suggest the agreement is best understood through a modern “new trade” and “global value chain” lens rather than the old textbook picture of exchanging cloth for wine. Many of the EU’s prospective gains are in intermediate and capital goods such as chemicals, machinery, medical devices, avionics, and auto parts—precisely the inputs that shape productivity growth downstream. This pattern is already visible in trade data—machinery, electrical equipment, and transport equipment together account for over 50% of EU exports to India, led by Germany, France, and Belgium. Meanwhile, India’s export strengths into the EU remain labour- and scale-intensive (textiles, footwear, fisheries, gems) alongside pharmaceuticals and chemicals, with textiles alone generating a surplus of over $6 billion and nearly $3 billion for pharma in 2023-24.
In a gravity-based view of trade, where flows are shaped by market size, distance, and policy-related frictions, a meaningful reduction in India’s trade barriers vis-à-vis Europe is likely to boost volumes most strongly in sectors where fixed costs and regulatory hurdles have previously constrained entry and where European firms enjoy clear technological advantages. This is one reason the agreement’s chapters on customs facilitation, transparency, technical barriers to trade, and conformity assessment are not peripheral; they are the channels through which the pact can convert formal preferences into realised market share.
At the same time, the agreement is a study in political economy constraint. India’s agricultural sensitivities are largely preserved, while the EU similarly ring-fences areas it labels sensitive. The European Commission’s agri-food factsheet makes clear the bargain: targeted openings for olive oil, processed foods, selected meats, and meaningful tariff reductions for alcohol, where current duties can reach 150%, in exchange for keeping politically explosive lines largely off the table or tightly managed through quotas and staging. That architecture fits the logic of “embedded liberalism”: Governments liberalise where adjustment is manageable and compensate, explicitly or implicitly, by shielding sectors with high distributive conflict potential.
The most consequential political-economy question is not whether tariffs fall but whether the agreement becomes a platform for investment-led structural transformation in India, which Europe should treat as a core strategic opportunity. There is a new India on the horizon with improved infrastructure and digital public goods, expanded renewable capacity, and competitive clusters in services and high-skill manufacturing while still facing deep challenges in job creation, inequality, informality, and policy implementation across a vast heterogeneous territory.
Europe’s payoff, in that view, comes less from extracting marginal export access and more from participating in India’s industrial upgrade along a growth trajectory that is environmentally sustainable, and enabling supply-chain diversification. The FTA’s value, then, hinges on whether European firms see India as a credible, scalable production base with predictable rules, and whether Indian policy can translate negotiated commitments into on-the-ground reductions in transaction costs.
A dense EU-India rulebook, particularly on standards, customs cooperation, and digital trade, could either bridge regulatory blocks or deepen fragmentation, depending on its alignment with global norms. Nowhere is this tension clearer than in the deal’s sustainability and climate provisions. While the deal pairs enforceable commitments on labour and environmental standards with support for decarbonisation, instruments like the EU’s carbon border measures sit uneasily with India’s demand for policy space.
The implementation of the agreement will thus become a test of whether “green trade” can advance climate goals through cooperation and financing rather than conditionality, especially as India’s clean transition is increasingly economically viable.
Europe’s de-risking agenda needs alternative production nodes, and India offers scale, a young workforce, and a large domestic market; India, for its part, gains premium access to a high-income market while signalling to global capital that it can sign and implement deep agreements with stringent partners and is committed to an effective agenda for strengthening its competitiveness. The biggest upside is dynamic rather than static—not the one-time welfare gains from tariff cuts, but the possibility of endogenous growth effects from technology diffusion, competition, and investment deepening. The agreement’s promise lies in its capacity to raise productivity and create shared value across firms, sectors, and regions.
The India-EU FTA is neither a narrow economic win-win nor a mere geopolitical gesture. It is a complex liberalisation effort with meaningful behind-the-border commitments, shaped by domestic constraints and a weakening multilateral trade order. Its ultimate significance will lie in whether it strengthens competitiveness by enabling investment, technology diffusion, and regulatory predictability, and whether it functions as a building block that spreads workable standards on climate, labour, and digital trade rather than reinforcing bloc-based governance.
The agreement’s text and early coverage suggest the potential for the former, but outcomes will depend less on intent than on implementation capacity and on whether Europe approaches new India as a partner in transformation rather than as a market to be unlocked.