Cracking the FTA Trade Code: India and EU navigate differences, hurdles, and a tight timeline

According to Sanjay Kumar, Partner, Deloitte India, in 2013, the contentious demands from EU were on trade areas such as agriculture, SPS and TBT - the NTBs, patent protection, environment, labour and even Geographical Indications (GIs). But now, India is far more confident and can seek to have an agenda to gain market access.

Now after a nine-year lull, both nations have re-launched negotiations and their positions on several topics still remain widely separate. For instance, the EU's demand for liberalised policies in the agriculture sector might be left in limbo as there is still a question mark on India’s willingness to liberalise imports in the sector which is socially and politically sensitive.

“The important thing that creates a conducive environment for FTA is the United Kingdom’s (UK) exit from the EU post-Brexit,” mentioned an official source who sought anonymity. She added that negotiations were much complex as India and the UK have service economies which made their strengths similar. “So even when the rest of the EU, particularly France and Germany, were willing to make concessions, Britain did not allow any such progress,” she said.

The current FTA between the stakeholders is envisaged to be much more comprehensive than India’s recent deals with Australia and the UAE. In 2021, India was the EU’s 10th largest trading partner occupying 2.05 percent of its total bilateral trade, whereas the EU was India’s third largest trading partner accounting for 88 billion euros worth of trade in goods in 2021 or 10.8 percent of total Indian trade. India-EU bilateral trade in goods in 2021 increased by 35 percent to 88.1 billion euros compared to bilateral trade in 2020 of 65.2 billion euros.

India and the EU laid the foundation for negotiation talks by establishing the Trade and Technology Council (TTC), according to Kumar. This forum aims to enhance bilateral trade by acting as a ‘coordination platform to address key trade, trusted technology and security challenges’. He opines that it will help the country in supplying high-end products, their components, and also to transfer high technology to improve domestic industrial capacity.

Data protection was another important area in which India made phenomenal advancements under the current regime which made it a trustable partner for the developed world as it was one of their main concerns. But it is also noteworthy, particularly in the case of the EU, that the requirement of personal data protection standards is still quite high.

“This time, negotiations in the areas of trade, investment protection, and geo­graphical indications (GI) will be conducted separately and not, as is often the case, as chapters of one single, comprehensive agreement. This increases the likelihood that a result can be reached in at least one or two areas,” wrote the German Institute for International and Security Affairs in its research paper titled ‘Negotiations on a Free Trade Agreement between India and the EU’.

According to Dutta, this shows a consistent approach and political will towards advancement in the negotiations. There might be a tight timeframe to conclude negotiations before India’s general election in 2024. But does that mean everything is as easy as falling off a log? Not really.

On the issue of rules of origin criteria both the countries still have differences. They are required to determine the national source of product which further helps in deciding eligibility criteria for free or preferential import tariffs. “Two criteria used under this system include tariff level changes and minimum value additions,” said Dutta. She added that the EU prefers the flexibility to use either of the criteria, as it allows flexibility for exporters and most of its products have zero tariffs. India has traditionally preferred the use of both criteria and is not given the flexibility to use either of them. The EU wants 95 percent of tariff elimination from India, which the country is not ready to do.

Another crucial hurdle between the FTA is the EU’s climate trojan horse, the Carbon Border Adjustment Mechanism (CBAM). Starting from October this year, exports of cement, iron, steel, aluminium, fertiliser, and hydrogen to the EU will be facing extra scrutiny. With an aim to achieve 55 percent lower carbon emissions by 2030 compared to 1990 levels, from the beginning of 2026, under CBAM the EU will start collecting a carbon tax on each consignment of these products. This mechanism poses a risk of making FTA commitments meaningless.

“We will not accept it,” said the official source when asked about the CBAM. She added, “Indian cement and steel are highly effective, cost-effective and are powering infrastructural transformation under PM Modi. Are we going to risk that? No way!”

Kumar believes that the carbon-intensive sectors will face the brunt of it. India is already trying to reduce carbon footprints by bringing mechanisms like Production Linked Incentive (PLI) schemes. “Businesses will have to catch the signals to be technologically better,” he said.

“The meltdown of American banks and then European banks resulted in the failure of 2010 negotiations because the EU withdrew concessions that it had made earlier to New Delhi for protecting our agriculture industry,” said the official source. According to her, there can’t be an FTA based on all the concessions from one side, particularly when it’s between a group of developed countries and a developing country. The current negotiations were planned before Russia invaded Ukraine when the EU's economy was robust. “But now they are in the same position where they will not be able to make compromises just like 2010,” added the source.

Despite these hurdles, both sides display political will, but navigating a tight timeframe and the need for balanced concessions remain critical. As negotiations continue, it is essential for India and the EU to find common ground and overcome obstacles for a mutually beneficial free trade agreement.