A landmark free trade agreement has been concluded between the European Union and India, hailed by leaders as the paramount trade pact. This accord establishes a unified market encompassing approximately two billion consumers and aims to significantly expand the €120 billion bilateral trade. Projections indicate a potential boost to the EU's exports to India, currently valued at €48.8 billion, aligning with the International Monetary Fund's forecast of India's economic growth at 6.4% for the current and subsequent years. The agreement's ratification now awaits approval from the European Union Council, a vote in the European Parliament, and endorsement from India's Union Cabinet.
The agreement was formalized amidst escalating tensions between the United States and the EU, particularly concerning renewed tariff threats against the EU over Greenland and disagreements on issues like immigration, artificial intelligence, and free speech. Similarly, India-US relations deteriorated following Washington's imposition of punitive tariffs on Indian oil imports from Russia, which led to the collapse of their anticipated bilateral trade deal. This backdrop underscores the strategic importance of the EU-India pact.
This comprehensive yet pragmatic free trade agreement includes India's commitment to reducing or eliminating tariffs on over 96% of goods traded with the EU, while maintaining protective measures for sensitive sectors such as agriculture and dairy. Notably, India will drastically cut tariffs on European car imports, from a high of 110% down to 40%, with a gradual reduction to as low as 10% for an annual quota of 200,000 to 250,000 vehicles. Import barriers on European wines, spirits, machinery, chemicals, pharmaceuticals, and aircraft components will also be phased out.
In exchange, the EU will lower tariffs on Indian textiles, garments, gems, jewelry, leather goods, marine products, and chemicals. Many of these Indian sectors were adversely affected by US tariffs imposed previously, making the timing of this deal particularly advantageous for Indian exporters. However, the agreement explicitly excludes generic medicines, staple farm products like dairy and cereals, and the EU's Carbon Border Adjustment Mechanism, acknowledging the complexities of these highly sensitive areas.
The strategic rationale behind this EU-India free trade agreement is heavily influenced by the shifting global landscape, particularly concerning China. For decades, European manufacturers viewed China as a primary driver for growth in sectors such as automobiles, machinery, chemicals, and clean technology. However, European automakers have recently experienced a significant decline in market share relative to China. This new agreement is poised to counteract that trend, offering a new avenue for growth and reducing reliance on the Chinese market.
This trade deal is expected to significantly benefit European automakers. With India's domestic car sector previously facing tariffs ranging from 70% to 110%, companies like Volkswagen AG, Renault SA, and Stellantis NV, along with luxury brands such as Mercedes-Benz Group AG and BMW AG, anticipate increased sales. Volkswagen Group has already recognized India as a strategically important, high-growth market, having produced two million vehicles in the country by 2025.
However, European car manufacturers will encounter intense competition in the Indian market from established players like Hyundai Motor Co. and Suzuki Motor Corp. Indian domestic companies such as Tata Motors Ltd, Maruti Suzuki India Ltd., and Mahindra & Mahindra Ltd. collectively command approximately 67% of total vehicle sales in India, while European manufacturers currently hold less than 3% of the passenger vehicle market. Experts suggest that while the agreement is a positive step, success for European brands will depend on adapting to the Indian consumer preference for affordable and reliable vehicles.
The announcement of the FTA led to mixed reactions in the Indian stock market; while overall benchmarks like the Nifty 50 and BSE Sensex saw slight gains, shares of domestic automakers like Maruti Suzuki India, Tata Motors Passenger Vehicles, and Mahindra & Mahindra experienced declines due to concerns about increased competition from European imports. Additionally, Indian specialty chemical firms and steel giants may face intensified competition and potential carbon price hikes due to EU regulations. Despite these challenges, the agreement marks a significant recalibration of trade strategies, aiming to diversify economic partnerships and enhance economic security for both regions in an increasingly unpredictable global environment.