Can Geopolitical Alignment Seal the India-EU FTA?

This publication is part of Carnegie India's Practitioner Paper Series, which highlights the experiences of professionals from the world of politics, public administration, and business.

Introduction

Despite significant differences in the status of their economic development, it is fair to say that the European Union (EU) and India are often considered “middle powers” by geopolitical pundits.¹ This is admittedly less fair to the EU than it is to India. By the same token, it is argued by many that the EU and India have the potential to occupy independent poles in an emerging multipolar world. The fact that they are not yet poles is due to interesting and varying reasons. While the EU is incontestably an economic giant, it lacks commensurate geopolitical influence. As for India, while it may find itself in a geopolitical sweet spot, it has miles to go before acquiring serious economic heft.

Notwithstanding the above, there is a significant amount of strategic convergence between the EU and India. For starters, the notion of autonomy and independent foreign policy underpins strategic thinking in both the EU and India. It is easy enough to understand this for India. After all, the country was a leader of the nonaligned movement and is now a serious claimant to the leadership of the Global South. It is less easy to associate this with the EU. After all, the EU benefited enormously from the Marshall Plan and has the formal status of being the transatlantic ally of the United States, though at the time of writing, this allyship is under tremendous strain. Nonetheless, the EU has not always agreed with the United States on issues of war and peace, an example of which is the latter’s invasion of Iraq in 2003. With President Donald Trump having assumed office in the United States and having revealed his cards on Ukraine, the EU has been left astounded.

This article will argue that the geopolitical circumstances have never been more conducive, not merely for the early conclusion of the free trade agreement (FTA) between India and the EU, but also for crafting a substantive and comprehensive strategic partnership. Eventually, this should contribute to the emergence of the EU first and then India as strong poles in a multipolar world. Such a development is in the abiding interest of both the EU and India.

A History of India-EU Ties

While India was among the first countries to establish diplomatic relations with the erstwhile European Economic Community in the early 1960s, it was only in 2004 that the two decided to upgrade their relationship to a “strategic partnership.” But before that, India had decided to establish a strategic partnership with France in 1998 and Germany in 2000. This dichotomy between the commission based in Brussels and the individual member states in capitals such as Paris or Berlin continues to this day. The issue goes to the heart of the matter of the EU’s competences. There are areas of exclusive competence, shared competence, and competence to support the actions of the member states. This complex decisionmaking process has often led India to deal with member states, especially where it can. In practice, this meant that leaving aside matters of exclusive competence, such as customs union (tariffs), common commercial policy, and concluding international agreements, everything else was within the competence of individual member states. It is worth recalling that bilateral India-EU trade in 1980 was a mere €4.4 billion (approximately $4.8 billion or Rs 41,500 crore). By 2005, when the strategic partnership had already been established, it had increased to €40 billion (approximately $43.65 billion or Rs 3,78 lakh crore. For the year 2023–24, this had increased to €123.7 billion (approximately $134.98 billion or Rs 11,709 lakh crore), making the EU India’s largest trading partner.

At the seventh India-EU Summit in Helsinki in 2006, both sides recognized that “stronger economic engagement” would be “mutually advantageous” and agreed to aim for “a broad-based bilateral trade and investment agreement.” Negotiations in this regard began in June 2007 and covered the following areas: trade in goods, trade in services, investment, sanitary and phytosanitary measures, technical barriers to trade, trade remedies, rules of origin, trade facilitation, competition, trade defense, government procurement, dispute settlement, intellectual property rights (including geographical indications), and sustainable development. After fifteen rounds of negotiations in Brussels and Delhi, the talks were effectively suspended by 2013.

It is important to ask why the talks failed, for it may provide important lessons for the current negotiations. The main reasons for the failure were the following:

1. The political leadership on both sides did not get involved sufficiently enough, and things were largely left to the lead negotiators. Trade negotiators are distinct in significant ways. They are trained to focus on granular monetary calculations, and this trumps everything else for them.

2. Both sides allowed the best to be the enemy of the good. The EU was adamant about automobiles, spirits, and agriculture; India was pushing for mode 4, a stipulation concerning the movement of natural persons under the General Agreement on Trade in Services, and generally avoiding difficult concessions in intellectual property rights, government procurement, and sustainable development.

3. Compromise in trade agreements is largely a matter of timing. By 2013, India was heading to an election, and any serious concessions made to the EU would have become a political issue. For the European Union too, 2013 was an important year. Attempts were made to question the competence of the commission, and growth was negative for the euro area. Unemployment was high too. In this climate, the EU may have also found it difficult to grant India benefits in mode 4, for example.

4. Two big issues continue to bedevil trade negotiations between India and the EU. The first set of issues concerns government procurement as well as labor and the environment, which are inherently difficult for India. The second is India’s obsession with the policy space. Typically, India has acquired more policy space than it needs in trade negotiations, evidenced by the fact that even the policy space already acquired is not put to good use. This issue needs reconsideration at the highest level by India. For the EU, the bugbears are mode 4, an insistence on higher standards for intellectual property rights, and their desire to access the Indian agriculture market, the last of which is a sensitive subject in India.

That said, it is the author’s view that India lost more by not signing an FTA with the EU in 2013 than vice versa. It is undeniable that bilateral ties, especially when it comes to trade, are well below potential. This is because, at present, the only legal basis for bilateral trade and services between India and the EU is the most-favored-nation (MFN) principle ordained under the General Agreement on Tariffs and Trade, which is part of the World Trade Organization. The EU used to grant tariff preferences to India under the Generalised Scheme of Preferences (GSP), but it suspended them at the beginning of 2023. Countries like Pakistan, Bangladesh, and Sri Lanka, which export garments to the EU, get tariff preferences that India does not. On top of that, countries like Vietnam have already signed an FTA with the EU in 2019, which entered into force in 2020. Vietnam can therefore export to the EU under much more favorable terms than India. This has put India at a severe disadvantage. While it can and should push for GSP restoration, the more logical thing for India would be to sign an FTA with the EU.

India has embarked on a series of FTAs from 2021 onward after not signing any from 2012 to 2020. Prior to 2012, almost all of India’s FTA signatories were to its east, namely, the Association of Southeast Asian Nations (ASEAN), Singapore, Japan, South Korea, and Sri Lanka. One of the main reasons why India did not sign any FTAs from 2012 to 2020 is its mixed experience with the above agreements. If one takes the yardstick of Indian exports in particular, it was observed that India’s FTA partners exported much more to India than vice versa. The reasons for this are not difficult to fathom. One, Indian manufacturing is fundamentally uncompetitive, especially vis-à-vis East Asian economies, not to speak of China’s advantage in this regard. Moreover, there are serious nontariff barriers faced by Indian exports in these markets. This becomes relevant when Indian exports like buffalo meat and pharmaceutical products face serious regulatory delays and obstacles.

Furthermore, the motives for signing an FTA are not just to increase trade but also to seek more investment, which can allow the recipient country to be part of global and/or regional value chains. This is where India has failed. It would be wrong to blame the FTAs alone for this. The more important reasons have to do with India’s inability to carry out deep-seated reforms in land, labor, and logistics, which are the main drivers for attracting investment. Besides, India has yet to make the full transformation from red tape to red carpet for foreign investors. This was also the time when India did away with all the bilateral investment treaties (BITs) and failed to replace them with a predictable framework for foreign investors. The point to note is this: FTAs are only one part of the puzzle, and trade, investment, and value chains are all intrinsically linked—a weak link in one of these areas will jeopardize favorable outcomes in others.

After arguing until 2019 that it was generally against FTAs, India did a volte-face in 2021, when it embarked on a series of FTAs with countries to its west. The main ones were with the UK and the EU. There were a few reasons for this. By then, it had become obvious that FTAs were a necessity for promoting foreign trade and that relying on MFN status alone would not suffice, especially if India dreamed of becoming a $10 trillion economy. After all, 31.80 percent of India’s gross domestic product is made up of foreign trade. Second, it was felt that FTAs with the West were a better proposition for India since its manufacturing noncompetitiveness could be masked better vis-à-vis the Western economies. Third, India hoped to get on to the resilient supply chains being fashioned by the West, having missed out on the global value chains. Lastly, India hoped to benefit from a significant transfer of technology from the West while implementing FTAs with them. Its experience of acquiring technology from China or from East Asia has not been great.

The Current Status of India-EU FTA Negotiations

Having abandoned FTA talks in 2013, why did India and the EU agree to resume negotiations in May 2021 for a “balanced, ambitious, comprehensive, and mutually beneficial” trade agreement, besides launching separate negotiations on an investment protection agreement and an agreement on geographical indications? At the time it was launched, the two sides agreed to fast-track the talks with the aim of concluding them by the end of 2023. The motives were different for the EU and for India. For the EU, it was becoming harder and harder to ignore India as a potentially attractive market. Post pandemic, China was becoming problematic, and the EU started thinking of “de-risking” from China and diversifying its trading partners. And India fit the bill not just because of certain common values such as democracy, human rights, pluralism, and rule of law, but also the size of its market. As per a 2023 study by the European Jacques Delors Institute and the Observer Research Foundation, “all but one of the top twenty EU exports to India had seen a reduction in their share of Indian imports over the past decade, particularly following India’s signing of FTAs with Japan, South Korea, and ASEAN.” The report demonstrated that the Indian market offered significant opportunities for the EU in the future, particularly if an FTA can be concluded by the two sides.

For India, the EU is a significant export market and a serious origin for investment. However, Indian exports to the EU suffer from the absence of duty-free access, which countries like Vietnam, Bangladesh, Sri Lanka, and Pakistan enjoy. There is thus a serious case for India concluding an FTA with the EU. As for investment, the EU is one of the most important investors in India, with its stock being close to €100 billion (approximately $109 billion or Rs 9.46 lakh crore) in 2020. Given that India had done away with all the BITs by 2016, the negotiations with the EU on a stand-alone investment agreement assume importance.

A word on why it was considered necessary to have three separate negotiations on trade, investment, and geographical indications: this was largely in response to a request by the EU, which wanted the three separate tracks. One reason could be not to overload the negotiations, because the same people seldom negotiate trade and investment. The other reason could be that while the EU has exclusive competence on investment treaties, it does not have it in the case of investor-state dispute settlement provisions. The idea was not to let the FTA, where the EU has exclusive competence, be held ransom to other issues where the EU may have shared competence. 

From July 2022 to September 2024, there have been nine rounds of negotiations on the FTA. There is also a detailed elaboration of the EU’s textual proposals on twenty-four different subjects. The reports are qualitative and do not necessarily reveal the sticking points. But they do give the reader an idea about overall progress. In a similar vein, there have been five rounds of negotiations on an investment protection agreement from June 2022 to June 2023. The fact that there have been no talks on the subject since June 2023 would seem to suggest that the talks are stuck. On geographical indications, there have been six rounds of negotiations from June 2022 to March 2024, and while an exchange of 200 products has been done, it was agreed that talks would resume after the Indian elections. This is yet to happen.

The sticking points from the Indian side, from all accounts, seem to be agriculture and dairy, government procurement, labor standards, sustainable development, and some crucial issues related to investment. By the same token, the above issues become important for the European side as well. In addition, the mobility of professionals, data secure status, and issues related to totalization assume importance for India and seem difficult for the EU.² It will be interesting to see if India manages to conclude the FTA with the United Kingdom (UK) ahead of the one with the EU. In which case, the UK deal may become a “floor” while offering clarity about the concessions India can make at this point.

Conclusion

It is now clear that Trump has brought a wrecking ball to what is left of the liberal international order. The latest example of this is the public spat between him and Ukrainian President Volodymyr Zelensky in the White House. With transatlantic ties in tatters, a new and messy multipolar world is emerging from the ruins of the old order set up in the aftermath of World War II. Given the existential challenge posed to Europe by Trump’s geopolitical maneuvers vis-à-vis Russia in the context of the war in Ukraine and Chinese maneuvers, the timing may be right for the EU to seal an FTA with India. The EU’s strengthened partnership with India also enables strategic hedging followed by both these powers.

In an unprecedented move, the entire college of EU commissioners, led by President Ursula von der Leyen, visited New Delhi on February 27–28 to meet Indian Prime Minister Narendra Modi and his cabinet colleagues. Von der Leyen set the tone for the visit by saying that India-EU ties “have the potential to be one of the defining partnerships of this century.” She also argued for a “no limits partnership.” In a leaders’ statement, both Modi and von der Leyen agreed, inter alia, on the following points. Collectively, these could constitute the new roadmap:

1. Expedite the conclusion of an FTA by the end of 2025.

2. Take stock with relevant stakeholders to push for the connectivity initiative India–Middle East–Europe Economic Corridor.

3. Explore a bilateral security and defense partnership agreement.

4. Convene the meeting of the next EU-India Trade and Technology Council (EU-India TTC) at an early date.

After a substantial gap, the EU-India TTC met in Delhi on the margins of the von der Leyen visit and came up with a substantive joint statement. In his statement at the plenary session with von der Leyen, Modi identified eight concrete areas of priority cooperation. All the two sides need to do now is hunker down and get to work.

The geopolitical alignment between the EU and India is unmistakable. Transatlantic ties are under strain and the EU is seeking to de-risk from China. Amid these changes, India wishes to enhance its strategic space, which may be diminished by China’s advances as well as geopolitical uncertainty. If U.S.-induced geopolitical turbulence and an assertive China do not bring the EU and India closer together, nothing will. But von der Leyen may well be right; the planets appear to be aligned this time around.