As India, EU near free-trade agreement, here’s what’s at stake

India and the European Union (EU) are preparing for an agenda-packed last week of January by inching closer to the conclusion of their free-trade agreement (FTA), the process to achieve which has been going on for a while now.

Top leaders from the bloc, including European Council President Antonio Luis Santos da Costa, European Commission President Ursula von der Leyen and Kaja Kallas, vice-president of the EU, started reaching New Delhi over the weekend.

Also read: How Trump has taken the US-EU ties to a breaking point

Costa and von der Leyen will also be the guests of honour at India’s 77th Republic Day celebrations on Monday (January 26).

All eyes on 16th EU-India summit

The high-profile guests will represent the bloc at the 16th EU-India summit in the capital on Tuesday (January 27), which will be hosted by Prime Minister Narendra Modi. The event could see the culmination of the high-level engagements between the European body and the Asian economy with the unveiling of the FTA.

The summit is happening at an interesting time. Both Europe and India have been on the receiving end of US President Donald Trump’s tariff war, over geopolitical issues such as Greenland and Russia, respectively. It also takes place against the backdrop of a positive momentum in EU-India ties in recent times, and a consistent high-level engagement across various sectors.

'Mother of all deals'

That there is an urgency from both sides to see the deal reach a conclusion becomes clear when top leaders, including von der Leyen and Trade Minister Piyush Goyal, define it as the “mother of all deals”. Both sides are in the middle of an FTA spree, with India completing eight of them in four years, and the EU also realising many, including the recent one with the Mercosur trading bloc in South America.

When Costa remarks that India is a crucial partner for the EU and together, they “share the capacity and responsibility to protect the rules-based international order”, the message becomes clear in a world overshadowed by Trumpian antics.

Also read: A year into Trump 2.0, Europe’s faith in US fading fast

It may be mentioned here that in October last year, the Council of the EU endorsed the new strategic EU-India agenda and its goal of further improving ties with India, reiterating how they are blossoming.

Coming to the deal, it has many key elements.

Securing interests in disrupted world order

The pact is mutually beneficial for both sides seeking to secure economic and defence interests in an uncertain world. While New Delhi’s focus on FTAs reflects its intent to reach more markets with protectionism gradually overwhelming globalisation, the EU eyes supply-chain diversification and reduces dependence on China, another major disrupting force in the global economy, through the pact. Given India’s mammoth market and promising economic growth, the EU’s hopes for good returns are not ill-placed.

The bloc is one of India’s top trading allies, along with the US and China, with total bilateral goods and services trade surpassing USD 190 billion in 2024-25, Reuters reported. India’s export to the 27-member body has amounted to around USD 76 billion in goods and USD 30 billion in services, the report added.

As per the Global Trade Research Initiative, a think tank in Delhi, average EU tariffs on Indian goods are relatively low at just below four per cent, Reuters further added.

However, labour-intensive sectors, including textiles and garments, face duties of around 10 per cent. The upcoming FTA would facilitate restoration of the competitiveness that was lost after the EU started withdrawing tariff concessions under Generalised System of Preferences in 2023, on several products such as garments, pharmaceuticals and machinery, and balance off the impact that high US tariffs have produced.

Also read: EU unveils new strategic agenda to deepen ties with India

Besides, India also seeks access for its professionals and export of IT services through the deal.

The EU’s exports to India encounter significantly greater obstacles, characterised by a weighted-average tariff of more than nine per cent on goods valued at USD 60.7 billion for the year 2024-25.

Taxes are especially high on vehicles, automotive components, chemicals, and plastics. Reducing tariffs would create opportunities in the automotive, machinery, aerospace, and chemical sectors, while enhancing access to services, procurement, and investment in one of the largest and fastest-growing markets globally.

Issues still remain

Still, some areas need to be ironed out. Agriculture and dairy have been kept out of the purview. India is pushing back against EU requests to remove tariffs on over 95 per cent of products, indicating a figure closer to 90 per cent.

Automobiles, wine, and spirits continue to be sensitive sectors. India is contemplating gradual reductions or restricted quotas instead of abrupt tariff cuts, citing potential risks to domestic manufacturing.

Also read: What did Modi, EU leaders discuss?: Ending Ukraine war, sealing FTA deal

If tariffs are indeed curtailed under the FTA, European cars could become affordable in India, while lower duties on wine could see a reduction in prices of labels from places of that continent, particularly France, Italy and Spain.

Defence partnership

Embedded within the broader economic deal of the FTA is a subject of bigger consequence — the formalisation of an EU-India Security and Defence Partnership.

Kallas said the FTA would mark a big shift in how Europe and India see each other in terms of defence. From a simple buyer-seller equation where a few European suppliers played a dominant role, the relationship is set to turn into a structured industrial tie-up with long-term significance.

Addressing the European Parliament recently, the EU vice president said the bloc has agreed to proceed with a security and defence partnership which will see the two sides’ cooperation expanding into maritime security, counterterrorism and cyber defence.

Speaking in the European Parliament earlier this week, Kallas confirmed that the European Union had agreed to proceed with the signing of a new Security and Defence Partnership with India.

As part of plans to boost the military-industry ties, a new EU-India Defence Industry Forum is being established, which will see companies from both sides coming together for joint production, technology collaboration and supply chain integration, said an Economic Times report.

India is seeking "data-secure" status in accordance with EU data regulations, along with simplified mobility for professionals and exemption from double social-security contributions.

Also read: PM Modi announces ‘limitless’ India-Germany economic partnership

The EU, on the other hand, aims to gain wider access to India's financial and legal sectors, as well as assurances regarding labour, environmental standards, and intellectual property rights — domains in which New Delhi favours a more flexible approach.

For India, a few primary issues that remain are the EU’s carbon border tax (Carbon Border Adjustment Mechanism or CBAM), which may diminish tariff benefits for Indian exporters, and elevated non-tariff obstacles, including regulatory holdups, rigorous standards, and certification expenses.

For Europe, protection of intellectual property is a major concern and is seeking better data protection and tighter patent rules.

Why EU FTA timing is key

For India, the importance of the agreement is its timing. The country’s domestic defence sector has established itself and gained credibility. What it requires now is growth. Europe not only presents a demand but also a partnership that can simultaneously provide advanced technology, capital, and market access.

Also read: Trump says framework reached for Greenland deal, cancels EU tariff threat

Collaborative development programmes and co-production agreements would assist Indian companies in advancing up the value chain, evolving from component suppliers to system integrators and exporters of sophisticated platforms.

Simultaneously, attracting European investment aligns seamlessly with India’s goal to become a global leader in defence exports.

The defence policy of Europe is also experiencing a significant transformation. As member states of the EU increase their defence expenditures and aim to lessen their military reliance on the US —prompted by the unpredictability of Trump's approach to NATO — Europe is proactively broadening its defence alliances.

Geopolitically, the January 27 summit aims to establish an India-EU “Third Pole” in a world of growing US-China bipolarity.

In terms of supply-chain resilience, both sides are racing to “de-risk” from China. For the EU, India is the primary manufacturing alternative; for India, the EU is a source of advanced R&D and capital.

Indian exports, particularly textiles and jewellery, have been hit by 50 per cent tariffs in the US since late August 2025, the FTA gives an alternative.

Similarly, The FTA provides immediate alternative access to the EU's USD 22.5 trillion economy, helping Indian firms absorb shocks from the fractured trade ties with the US.

FTA could take more time after signing

However, even if the FTA is signed soon, it would still take some time to see the light of day; it has to be ratified by the European Parliament, which could take at least a year.

Moreover, a decision made by EU legislators earlier this week to contest the Mercosur agreement in the bloc's highest court underscores the potential for parliamentary obstacles to postpone or complicate the ratification process. Despite that, Ursula von der Leyen said on Friday the EU was willing to implement the FTA on a provisional basis as soon as at least one Mercosur country ratifies, showing its urgency in putting the pact in place.

Anyhow, despite the potential delay and obstacles, analysts feel that the FTA would prove to be a win-win situation for both the EU and India in the long run.

Alex Capri of the National University of Singapore told the BBC that eventually, it could accelerate the process of trade decoupling from the US and other unreliable partners. It will entail diminishing dependencies on Trump's America — or China — thereby reducing vulnerabilities to the fluctuating nature of tariffs, export controls, and the overall weaponisation of supply chains, he said.

Observers feel current geopolitical realities and trade shocks have pushed both the EU and India towards a pragmatic compromise. Now, whether they can successfully weed out the irritants to serve the greater good will determine the pact’s overall success.