By Annunthra Rangan
In a world increasingly defined by tariff wars, disrupted supply chains, and the weaponisation of trade, India and the European Union have made a consequential move. On January 27, 2026, after nearly two decades of intermittent negotiations, the two sides signed a landmark Free Trade Agreement (FTA). The timing is deliberate. With both India and the EU facing renewed trade pressure from the United States, and Europe actively seeking to reduce its dependence on Chinese goods, the agreement arrives not merely as an economic instrument but as a strategic statement.
At its core, the FTA aims to dismantle trade barriers and expand market access on both sides. For India, it opens preferential entry into a market of nearly 450 million high-income consumers—characterised by stable demand, deep capital pools, and sophisticated value chains. For the EU, it unlocks access to one of the world’s fastest-growing major economies, with a vast consumer base and a policy thrust increasingly aligned with manufacturing expansion and infrastructure investment. Both sides are responding to a new global reality in which trade has become a tool of coercion, and resilience a central policy goal.
The agreement promises tariff reductions and improved competitiveness across key sectors. India stands to gain most in textiles, pharmaceuticals, machinery, steel, petroleum products, and electrical equipment—areas where exports have long been constrained by high tariffs or complex European regulatory regimes. The EU’s withdrawal of Generalised Scheme of Preferences (GSP) benefits for India in 2023 had already raised costs for Indian exporters. The new deal not only restores incentives, but deepens them, encouraging Indian firms to re-engage with Europe at scale.
The services chapter is equally consequential. The EU will open 144 services subsectors to India, while India will liberalise 102 subsectors for European firms. This includes sensitive, high-impact industries such as financial services, maritime services, and telecommunications. For India, this could attract European capital, technology, and managerial expertise into sectors where efficiency and standards are as critical as scale. For Europe, it offers expansion into a rapidly digitising economy with rising demand for sophisticated services.
The agreement is not yet operational. It must still undergo legal scrutiny in Brussels and New Delhi, with implementation expected next year. Yet one of the most politically sensitive breakthroughs has already occurred—in automobiles. India’s high tariffs on foreign vehicles, which can reach 110 percent, were a key reason negotiations collapsed in 2013. This time, India has agreed to reduce tariffs on most EU car imports to 30-35 percent, with a phased reduction to 10 percent over several years.
The liberalisation, however, is tightly calibrated. EU cars priced below €15,000 are excluded and will continue to face higher tariffs. Vehicles above that threshold are divided into three categories, each governed by quotas and differentiated tariff treatment. Electric vehicles will be excluded from duty reductions for the first five years, shielding domestic investment and India’s growing EV ecosystem. Even so, Indian auto stocks dipped following the announcement, reflecting concerns over long-term competition and market share erosion.
On the European side, concessions are sweeping. Tariffs on 96.6 percent of EU goods exports to India will be eliminated or reduced, potentially saving European firms up to €4 billion annually in duties. India’s high tariffs—up to 44 percent on machinery, 22 percent on chemicals, and 11 percent on pharmaceuticals—have long deterred European manufacturers. These will largely disappear. Tariffs on aircraft and spacecraft will be eliminated for almost all products, while 90 percent of optical, medical, and surgical equipment will become duty-free.
India has also committed to improved access for EU firms in financial and maritime services, alongside simplified customs procedures and stronger intellectual property protections. These provisions directly affect investor confidence, supply-chain predictability, and operational ease across borders.
Export gains for India are equally substantial. The EU will eliminate tariffs on 90 percent of Indian goods immediately, expanding to 93 percent within seven years. Early beneficiaries include marine products such as shrimp and frozen fish, chemicals, plastics, rubber, leather, footwear, textiles, apparel, base metals, and gems and jewellery. Even marginal tariff reductions in the EU market can translate into significant export growth and employment gains in India.
Partial tariff cuts and quotas will apply to about 6 percent of Indian goods, reducing the EU’s average tariff rate from 3.8 percent to just 0.1 percent. Overall, 99.5 percent of bilateral trade will benefit from some form of tariff concession. If implemented effectively, the FTA could reshape India’s export strategy at a moment when diversification away from traditional markets has become an economic imperative.
Challenges remain. India continues to seek expanded duty-free steel export quotas. Under the current framework, India may export 1.6 million tonnes of steel to the EU duty-free—roughly half its present exports. Further negotiations are expected by June 30, 2026, ahead of new EU trade rules taking effect.
More contentious still is the Carbon Border Adjustment Mechanism (CBAM). The EU has refused India an exemption from this carbon levy on emissions-intensive imports such as steel, cement, fertiliser, and electricity. While Europe frames CBAM as climate fairness, India views it as a potential new trade barrier that could raise exporter costs. Exemptions are limited to EU-linked economies; India does not qualify. Yet the issue remains fluid, and future flexibility could emerge if exemptions are extended elsewhere.
Ultimately, the real test lies in implementation. India will face pressure to align with stringent EU standards on environment, labour, product safety, and data protection—burdens that will fall heaviest on smaller firms. Europe, meanwhile, must contend with India’s reputation for policy unpredictability. Trade trust depends as much on stability as on tariff cuts.
Still, the strategic logic is unmistakable. The India-EU FTA strengthens India’s role as a balancing power in a fragmented global order. It complements India’s existing trade pacts with ASEAN, Australia, and the UAE, reinforcing its ambition to become a central node in global commerce. Without choosing sides, India is expanding strategic autonomy—one trade corridor at a time.
—The writer is a Senior Research Officer at Chennai Centre for China Studies. Her research interests constitute China-WANA (West Asia and North Africa) relations and human rights
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