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EU-India Economic Agreements: A Fresh Start

In late June 2022, talks began between the EU and India on a free trade agreement, an investment protection agreement and a geographical indications agreement. After the failure of free trade negotiations between the two partners in 2013, this constitutes a new attempt to improve economic relations between the EU, India's second largest trading partner after the United States, and the South Asian country.

It is not only the timetable for the negotiations that is ambitious. In view of elections in India and the EU in 2024, both partners have set themselves the goal of finalising the agreements by the end of next year. At least the geopolitical and geo-economic convergence of interests should provide incentives for successful talks. Challenges such as tensions between China and democratic market economies, Russia's war of aggression against Ukraine, global warming, the Covid pandemic, and supply chains under pressure have increased the urgency for Europe and India alike to assert their strategic sovereignty by diversifying their partnerships. Europe is interested in finding in India a reliable ally that not only pursues similar geostrategic goals but also shares and defends common values such as multilateralism, respect for international law, democracy and human rights. New Delhi's position on these issues is being watched more closely than ever.

EU strategy for cooperation in the Indo-Pacific

By any measure, interest in India has increased within the EU. The 2020 policy “Guidelines for the Indo-Pacific” of the German Government have rightfully been read as a call for the expansion of interests in the region. When Portugal made the relationship with India a cornerstone of its Council Presidency in 2021, culminating in the EU-India Summit in May last year and in the announcement of renewed negotiations for investment protection and free trade agreements, it became clear that India’s potential as an ally and a market had inspired European foreign policy makers once more. This was also reflected in the “EU strategy for cooperation in the Indo-Pacific”, which mentions India as a partner in the fields of regulatory cooperation, human rights, trade and investment, green transition, digitalization, data protection, connectivity, security, and healthcare.    

While some welcomed this development as an overdue recognition that India needs to be taken more seriously, others pointed to protectionist and democratic setbacks in India that could limit the country's openness to stronger partnership and its growth potential.

Negotiations between the EU and India

Regardless of these differing assessments – the resumption of negotiations between the EU and India is seen as a welcome step by the German business community. Some industries have high hopes for the agreements and even see them as a prerequisite for deeper engagement with India, while others would welcome a successful outcome to the negotiations but point out that even without an agreement, some positive developments have already been observed in the past.   

Increase in imports by 40 percent 

A case in point is the mechanical engineering industry with an annual share of 25 to 30 percent in the total goods traffic. The sector’s duty burden on imports to India has been steadily decreasing since the first decade of the century and currently lies at 5 to 7.5 percent basic duty for most product groups. The sector’s exports to India increased by almost 30 percent in 2021, whereas imports from India to Germany grew by almost 40 percent compared with the previous year, thereby overcompensating for the losses of 2020 due to the pandemic.

German automotive sector at a disadvantage

Other sectors whose India engagement suffers from continued high tariff burdens, are still waiting for barriers to be lowered. The German automotive sector in India, for example, is currently at a disadvantage compared to its Asian competitors due to tariffs on imported components from the European Union. With the FTA between India and ASEAN, where Japanese and Korean manufacturers have a strong base, some components can be exported “duty-free” into India. In contrast, the fiscal burden on fully assembled vehicles from Europe ranges from 66 to a whopping 110 percent, where the highest tariffs apply to vehicles priced above 40,000 USD, including freight and insurance costs. Here, significant gains can be made from trade and investment agreements between the EU and India. 

High standards regarding social and environmental sustainability

But when asked about how likely it deems a success of the negotiations with India, the German business community is more inclined towards pessimism. This cautious appraisal is based primarily on the conflicting expectations both negotiation partners seem to have. While the EU prefers a comprehensive trade agreement that would likely include the service sector, this might be perceived as an attack on the many subsistence traders in India’s tertiary sector. They fear that the possible admission of Carrefour and other European trading giants might lead to their extinction and thus to additional social problems. More importantly, comprehensiveness also involves high standards regarding social and environmental sustainability, while India seems to prefer an agreement with an eye on “low-hanging fruits”.

Economy, ecology, and society

Whereas the EU wants to ensure that an increase in trade would not impact negatively on workers and the environment, India points to its own unique conditions, for example by referring to its vast informal sector that can hardly be managed according to European expectations. India’s insistence on the historical responsibility of industrialized countries regarding climate change does not make it easier to negotiate high environmental standards within the scope of an agreement. However, the current discourse in Europe with its focus on sustainability – in which economy, ecology, and society are seen as interlinked – needs to be understood by India as a core aspect of Europe’s strategic positioning.

Furthermore, business stakeholders still remember vividly how the previous trade negotiations had stalled in 2013. They wonder if the changes that have occurred in India since then are sufficiently substantial and warrant a more optimistic outlook. One of the obstacles is the exclusion list of the Indian side, in which those manufacturer groups are listed that would like to see certain products permanently exempted from tariff dismantling.

Pragmatic solution seems most promising

While the trade and investment negotiations must be pursued with full force and engagement, for the time being, a pragmatic solution to existing barriers seems most promising. Since India will not deviate from its general protective tariff policy in the foreseeable future, one way of easing it – particularly with regard to the Indian Government's repeatedly stated wishes for investments in the high-tech sector – would be project-related tariff suspensions for required capital goods, both for direct investments and for infrastructure projects.

Clear understanding of the opportunities involved

Nevertheless, both negotiating parties should conduct the talks with a clear understanding of the opportunities involved. India must be prepared to jump the hurdles posed by the sustainability chapters for the sake of strengthening alliances, while the EU must be prepared to offer India more flexible transition periods or a gradual entry into force of individual modules. Moreover, the EU and India need to explain to domestic audiences that the agreements are part of diversification efforts that reduce overdependence on established trading partners.